Lok Sabha Passes Bill to Allow UPI Merchant Fees: What It Means for Businesses and Consumers

The Lok Sabha has passed a Bill amending the Payment and Settlement Systems (PSS) Act, 2007, which will enable the Central Government to charge merchants and payment service providers Merchant Discount Rate (MDR) on UPI and other notified digital payment technologies. This is a major change in the policy of India in digital payments which until now has been free of MDR since January 2020. But the Bill does not necessarily apply any such charges immediately, and is only meant for future notifications.

What is MDR?

Merchant Discount Rate (MDR) is a transaction processing fee that merchants pay to banks or payment service providers when customers make digital payments. MDR has traditionally been applied to card transactions while UPI and RuPay debit card payments have enjoyed a zero-MDR regime to encourage digital adoption. As such, the Bill removes the legal barrier that held the government back from allowing MDR on these payment methods.

Will consumers have to pay?

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Finance Minister Nirmala Sitharaman said the proposed MDR is not meant to be charged to consumers. But should it be implemented, it would be paid by eligible merchants accepting digital payments. The government has said that ordinary UPI users making payments or transferring money are not expected to be directly charged under the proposed framework.

Who Could Be Affected?

Even though the government has not yet announced the final rules, reports indicate that MDR can apply only to:

Large merchant transactions. High-value UPI payments, possibly above ₹2,000. Businesses with annual turnover above a certain threshold.

Small merchants and micro-enterprises would be exempt under the proposed framework and the final eligibility criteria will be made public in the future.

How is the government making this change?

Banks, fintech players, and payment service providers have long argued that maintaining India’s rapidly expanding UPI ecosystem requires continuous investment in technology, cybersecurity, infrastructure, and fraud prevention. Since UPI transactions generate little direct revenue for service providers, the government believes that MDR for certain merchant transactions could create a more sustainable financial model while keeping UPI free for consumers.

What is next?

Though the Lok Sabha has passed the Bill, merchant charges will not begin immediately. The legislation only authorizes the government to announce MDR in the future. The details of the transaction threshold, merchant types, MDR rates, and implementation time will be detailed after the legislative process is complete and the regulations are laid out.