UPI Charges: Govt Weighs MDR for High-Value Transactions Or Tiered Incentives to Reduce Costs

The government is looking at ways to reduce the financial burden of running the Unified Payments Interface (UPI), with the Department of Financial Services considering changes to the current zero-MDR system.

According to a report by Business Standard, the government is examining two options: bringing back the merchant discount rate (MDR) for certain high-value UPI transactions or merchants, or introducing a tiered incentive system that would gradually reduce government support for UPI over the next few years.

The issue has gained importance as UPI transactions have grown rapidly, while banks and payment companies continue to bear the cost of processing these transactions.

Govt Considering Two Options for UPI Payments

The Department of Financial Services has told the Parliamentary Standing

Committee on Finance that it is examining two possible ways to make the UPI ecosystem financially sustainable.

“Given the sustainability of the UPI ecosystem and the burden on the Government exchequer, the Department is currently exploring two options: (i) Examining the feasibility of restoring MDR for certain high-threshold transactions/merchants; and (ii) A tiered incentive structure to phase out the government support in the next few years,” the Finance Ministry said in its reply to the committee dated July 17, as reported by Business Standard.

This does not mean that UPI users will immediately have to pay a charge. The proposal being considered is focused on selected high-value merchant transactions rather than everyday person-to-person UPI payments.

What Is MDR and Why Is It Important?

MDR, or merchant discount rate, is a fee charged on certain digital payments. It is generally paid by the merchant for accepting a digital payment, with the amount being shared among participants in the payment ecosystem.

For UPI, MDR was applicable on merchant transactions at a rate of up to 0.30% until 2019. The government subsequently introduced zero MDR for UPI transactions from January 2020 to encourage digital payments and reduce dependence on cash.

The zero-MDR system means merchants do not pay a transaction fee for accepting UPI payments. However, banks and payment service providers still incur costs to operate and maintain the system.

Why Is the Govt Looking at UPI Charges Now?

The growing cost of operating the UPI ecosystem is at the centre of the debate. The Parliamentary Standing Committee on Finance noted that the government had allocated Rs 2,000 crore to incentivise UPI transactions and compensate for losses arising from zero MDR. In comparison, the industry’s estimated operational cost was around Rs 20,700 crore, according to the Business Standard report.

The committee has therefore raised concerns about whether the existing incentive system can support UPI’s rapid expansion over the long term.

“While statutory enablement now exists to permit calibrated MDR on high-value transactions, any delay in notifying and operationalising this framework leaves payment service providers heavily dependent on inadequate subsidies, thereby threatening critical investments in cybersecurity, fraud prevention, and network infrastructure,” the committee said in its report, as quoted by Business Standard.

In simple terms, the concern is that payment companies need a sustainable source of revenue to keep investing in the technology and security required to handle India’s growing digital payment volumes.

What Is the Tiered Incentive Model?

The second option being considered is a tiered incentive structure. Under such a system, government support could gradually reduce over the coming years instead of being withdrawn suddenly. The exact structure, including the level of incentives and the transactions that would qualify, has not yet been finalised.

The idea would be to reduce the payment industry’s dependence on government compensation while ensuring that the transition does not disrupt UPI’s growth.

Will UPI Become a Paid Service for Users?

There is currently no indication that the government plans to impose a general charge on consumers for making UPI payments. Business Standard reported that Finance Minister Nirmala Sitharaman said any future fee would apply only to a limited category of merchant transactions above a high threshold. Consumers would continue to be able to make instant digital payments through UPI without a transaction charge.

The distinction is important because a charge on selected high-value merchant transactions would be very different from introducing a fee every time an individual uses UPI to send money to another person or make a small purchase.

UPI Could Handle 150 Billion Transactions a Month

The scale of UPI is another reason the government is looking for a long-term funding model. The parliamentary committee said UPI could eventually process as many as 150 billion transactions a month and add around 600 million new users, according to Business Standard.

At this scale, even a small cost associated with every transaction can add up to a substantial amount for banks, payment service providers and other participants in the ecosystem.

The committee also noted that the current government incentive covers only around 11% of the industry’s actual costs and about 14% of potential MDR collections, the report said.

What Could Happen Next?

The government has not yet announced a final decision on the proposed changes. According to Business Standard, the UPI and Services Steering Committee headed by the National Payments Corporation of India (NPCI) will decide the structure of any MDR and the threshold above which transactions could attract the fee. The government has maintained that any MDR would apply only to a limited set of merchant transactions above a specified threshold and at a nominal rate, lower than charges generally associated with debit or credit cards.

For consumers, therefore, the immediate takeaway is that UPI is not being made chargeable across the board. The government is instead looking for a way to make the system financially sustainable as transaction volumes continue to rise.

The Parliamentary Standing Committee has also stressed that UPI needs a viable revenue model so that its expansion does not continue to place a heavy burden on the government budget.