Is MDR coming back on UPI? What the proposed law change means

The government on Monday proposed a bill to amend the Payment and Settlement Systems (PSS) Act, 2007 that could eventually allow merchant discount rate (MDR) to be charged on some UPI transactions.

The amendment bill was tabled in the Lok Sabha on Tuesday. However, even if passed by parliament, it will not change anything for consumers or merchants immediately. It is only an enabling provision that allows the Reserve Bank of India (RBI) to change rules and permit the levy of MDR on merchants. The government removed MDR in January 2020 to accelerate the adoption of digital payments across the country.

Mint explains the government’s proposal, whether MDR could return on UPI, and its impact on consumers.

What exactly has happened?

Merchant discount rate is a small fee paid by the merchant every time a customer makes a digital payment. It is already charged on most debit card and credit card transactions.

This charge is shared among banks, payment networks and payment service providers that process the transaction.

Today, merchants cannot be charged MDR on UPI (unified payments interface) transactions because the law explicitly prohibits it, which means the infrastructure cost is borne by the ecosystem.

So, while consumers use UPI for free, banks and payment companies incur costs to maintain payment infrastructure, cybersecurity systems and fraud detection.

“In clause 2 of the Bill, in the Payment and Settlement Systems Act, 2007, amendment of section 10A in order to remove the reference of provision of Income-tax Act and also to provide that no bank or system provider shall impose, whether directly or indirectly, any charge upon a person making or receiving a payment by using one or more electronic modes of payment as may be notified by the Central Government,” the Bill said.

The proposed amendment removes this blanket ban, giving the government and the Reserve Bank of India (RBI) the legal authority to introduce MDR later, if they choose to, through regular notifications.

“They’re basically doing the legal groundwork because it’s a Parliamentary Act. Even if the government wants to introduce MDR today, it cannot do so until this section of the law is amended,” said Mohit Agarwal, executive director at Unaprime Investment Advisors.

If parliament approves the amendment, the RBI or the government can later decide whether MDR should be charged, on which types of merchants, and at what rate.

Why is this amendment needed?

UPI has grown into India’s largest digital payments system, processing billions of transactions every month. UPI processed a record 23.66 billion transactions worth ₹29.88 trillion ($313.47 billion) in July 2026, marking its highest-ever monthly volume.

Industry executives have long argued that there is no sustainable revenue model for processing large UPI transactions because merchants pay no MDR. Last month, Mint reported how payments, despite making up for half of the fintech industry’s ₹1.03 trillion in fiscal year 2025 (FY25) revenue, posted an aggregate loss of ₹5,300 crore, amid a lack of any sustainable profit pool from the transactions the industry processed.

Legal experts Mint spoke with pointed out that the amendment does not scrap the existing zero-charge rule or automatically bring back MDR on UPI. Instead, it keeps the ban on banks and payment firms levying fees on users, but changes how the covered payment modes are decided.

“What changes is that instead of automatically covering modes prescribed under Section 269SU of the Income-tax Act, it will cover modes separately notified by the central government. This gives the government power to determine which modes remain charge-free. Thus, UPI and RuPay remain protected only if included in the relevant notification,” said Rohit Jain, managing partner, Singhania & Co.

Jain explained that the enactment alone would not authorize MDR on UPI or RuPay, since Section 10A would continue prohibiting charges for every electronic mode specified by the central government.

“The first step would therefore be a notification identifying protected modes, potentially with carefully defined exclusions, if legally supportable. Although the Bill expressly mentions only this notification, actual collection may also require relevant RBI directions or approvals, NPCI or other system-provider circulars,” added Jain.

Who would benefit from the amendment?

Players across the payments ecosystem, including acquiring banks, payment gateways such as Razorpay and PayU, merchant payment companies like Pine Labs, and TPAP (third-party application provider) operators such as PhonePe, could be the biggest beneficiaries, potentially creating a new profit pool for the payments technology industry.

If MDR is re-introduced, companies involved in processing payments could earn a share of these fees.

Who stands to lose if MDR comes back?

Industry participants expect that if MDR is re-introduced, it is likely to be limited to large merchants, commerce-related transactions, and possibly transactions above a certain value, such as ₹2,000.

Today, merchants pay MDR when customers use debit or credit cards but not when they pay through UPI. If MDR is re-introduced for UPI as well, accepting UPI payments could become slightly more expensive for these businesses.

Experts also believe the government will avoid introducing charges in a way that discourages people from using UPI. “For example, certain categories such as tax payments, insurance premiums, rent or investments, especially where the platforms charge convenience fees and can move the burden towards users, may continue to remain exempt if charging MDR risks pushing users back to other payment methods,” Agarwal said.

The government has, however, not officially announced any such threshold.

What is clear is that the merchant—not the customer—will pay it.

This is the same system followed for card payments. For example, if a customer buys a ₹30,000 television using UPI, the retailer could pay a small percentage of that transaction as MDR. The customer would continue paying ₹30,000.

“Consumers don’t pay MDR. That’s a universal principle in payments—the party receiving money pays. The merchant pays because they are conducting commerce,” Agarwal said. “The government wants to ensure that consumers continue using UPI without friction while also creating a monetisation model for the ecosystem.”

For now, the government or the RBI will still have to issue separate rules specifying whether MDR will be re-introduced, which merchants or transactions it will apply to, and what the fee will be.

Until then, UPI payments will continue to remain free for both consumers and merchants.

Salman S.H. in Bengaluru contributed to this story.