Government Proposes Amendment to Reintroduce MDR on UPI Payments in 2026

30 SEC SUMMARY

The government is proposing an amendment to the Payment and Settlement Systems Act, 2007, which could reintroduce Merchant Discount Rates (MDR) on Unified Payments Interface (UPI) transactions after six years of zero fees. This move could impact the digital payment ecosystem and is expected to be tabled in Parliament soon. Industry reactions are mixed, with some welcoming the potential for cost recovery.

TABLE OF CONTENTS

1. Introduction
2. Amendment Details
3. Industry Reactions
4. Implications for UPI
5. FAQs
6. Conclusion
7. Call-to-Action

KEY HIGHLIGHTS

• Government proposes amendment to reintroduce MDR on UPI payments
• Potential reimposition of MDR after six years of zero fees
• Expected to be tabled in Parliament soon
• Industry reactions mixed
• UPI transaction growth continues despite potential changes

INTRODUCTION

In a significant move that could reshape the digital payments landscape in India, the government has proposed an amendment to the Payment and Settlement Systems Act, 2007. This amendment aims to reintroduce Merchant Discount Rates (MDR) on Unified Payments Interface (UPI) transactions, potentially ending the six-year period of zero MDR charges.

AMENDMENT DETAILS

The proposed amendment, part of the Taxation And Other Laws (Amendment) Bill, 2026, seeks to amend Section 10A of the 2007 Act. Currently, Section 10A bars banks and system providers from imposing a charge on UPI payments. However, the new amendment replaces the blanket prohibition with a provision that exempts only certain online payment modes, to be specified by the government.

Here's the key change:

In the Payment and Settlement Systems Act, 2007, in section 10A, for the words, figures and letters “the electronic modes of payment prescribed under section 269SU of the Income-tax Act, 1961”, the words “one or more electronic modes of payment as the Central Government may, by notification, specify” shall be substituted with effect from the date of publication of this Act in the official gazette.

This change would allow the Centre to directly notify which means of electronic payments remain exempt from MDR charges, without specifying which payment methods will attract MDR.

INDUSTRY REACTIONS

Even as ambiguity surrounds which online payment modes will attract MDR, fintech major Pine Labs’ cofounder and CEO Amrish Rau has welcomed the proposed rules. Rau believes that the zero-MDR regime has slowed the growth pace of the ecosystem in the past six years. He cited the examples of Brazil’s PIX and China’s real-time payment systems, which charge MDR of 30-40bps and have achieved over 90% penetration in digital payments.

Rau stated:

For us to get to 90% penetration, and to take UPI global, startups, fintechs, and banks will need to fund this expansion through continued investments in IT, innovation, and cyber security. These costs have increased by almost 300% over the last 12–24 months. While there should be some recovery of these investments, P2P transactions—and charges to consumers—should continue to remain zero.

IMPLICATIONS FOR UPI

The amendment comes amid a resurgence of debate around whether banks, aggregators, and other financial institutions should be allowed to monetize UPI. Currently, UPI transactions have carried zero MDR for nearly six years, driving widespread adoption of digital payments. However, players in the payments ecosystem have long sought to change this to cover the operational costs of running the infrastructure that powers digital payments.

The Centre had allocated ₹2,000 Cr to incentivize digital payments under the Union Budget for FY27, but industry leaders had been pushing for much higher subsidies. With the new norms, the government could be looking to do just that. But how?

Earlier last week, Inc42 reported that the government was weighing a targeted reintroduction of MDR. Under the proposal, businesses with an annual turnover of ₹1 Cr to ₹1.5 Cr or more would attract an MDR of 0.05% to 0.07% on UPI transactions above ₹2,000.

FAQs

What is the Merchant Discount Rate (MDR)?

The Merchant Discount Rate (MDR) is a fee charged by banks to merchants for accepting card payments.

Why is the government considering reintroducing MDR on UPI?

The government is considering reintroducing MDR to cover the operational costs of running the digital payments infrastructure.

What are the potential impacts of reintroducing MDR on UPI?

Reintroducing MDR could impact the growth pace of the digital payments ecosystem and affect the overall cost structure for fintech companies and banks.

CONCLUSION

The proposed amendment to reintroduce MDR on UPI transactions marks a significant shift in India's digital payments landscape. While it could help cover operational costs, it also raises concerns about the impact on widespread adoption and the overall cost structure for the digital payments ecosystem.

CALL-TO-ACTION

For more insights on the evolving digital payments landscape, visit blogy.in.