The central government has taken the first legislative step toward reintroducing Merchant Discount Rate (MDR) on select UPI and RuPay debit card transactions by introducing the Payments Regulatory Board Bill in Parliament. If the proposed changes are approved, banks and payment service providers could once again charge merchant fees on eligible digital payments, which could transform India's digital payments ecosystem after more than six years of zero-MDR policy.
What is changing?
Under the proposed legislation, the mandatory zero-MDR provision for UPI and RuPay debit card transactions would be removed. This does not mean that merchant charges will be imposed immediately. Instead, it gives the government and the RBI the legal authority to introduce MDR on certain categories of transactions in the future.
According to reports, the proposed MDR could be up to 0.5% of the transaction value for eligible merchant payments, but no final rate has been officially notified.
Small Businesses May Be Exempt
One of the key features of the proposal is that small merchants are expected to be protected.
Businesses with an annual turnover of up to ₹1.5 crore are expected to continue to enjoy zero MDR, so small shops, local retailers, and micro-enterprises do not bear additional payment processing costs.
If the merchant fee were implemented, the merchant fee would mostly go to large corporations and high-value commercial transactions rather than regular business transactions in small stores.
Consumers Are Unlikely to Pay
The proposed MDR is for merchants.
For ordinary UPI users, there is no proposal to charge a fee for making payments. Consumers will likely continue to have free UPI transactions, and the payment fee, if imposed, would be paid for by merchants that accept digital payments.
But businesses may be able to absorb the cost or adjust their pricing in relation to market competition.
Why is the government considering MDR again?
The government removed MDR on UPI and RuPay debit card transactions in January 2020 to accelerate digital payment adoption. Since then, UPI has become the world's largest real-time payment system, processing billions of transactions every month.
Banks, payment service providers, and fintech companies have long argued that maintaining the payment infrastructure is a high-cost investment (with technology upgrades, cybersecurity, fraud prevention, and settlement systems). Increasing the use of MDR for large merchants is therefore a strategy that can enable a sustainable business model while keeping digital payments affordable for consumers and small businesses.
What Happens Next?
The Bill must be debated and passed by Parliament before the proposed changes can take effect. Even if the bill becomes law, the government and RBI also need to give detailed rules on the MDR rate, transaction thresholds, and merchant categories.
Until then, UPI payments remain free for consumers, and the zero-MDR regime continues to be in place.
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