Introduction
The Unified Payments Interface (“UPI”) has transformed India’s digital payments ecosystem by enabling instant payments without a direct transaction charge for consumers and merchants. However, its unprecedented growth has raised a fundamental question: if UPI transactions remain free for users, who should ultimately bear the cost of maintaining the infrastructure?
The question has gained renewed significance in August 2026, with reports indicating that the Government is considering amendments to the Payment and Settlement Systems Act, 2007 (“PSS Act”) that could enable the reintroduction of Merchant Discount Rate (“MDR”) on specified UPI transactions. The proposal is reportedly focused on large merchants and higher-value commercial transactions, while smaller merchants and peer-to-peer payments may continue under the zero-MDR framework.
The development comes against the backdrop of unprecedented UPI volumes. In July 2026, UPI processed approximately 23.66 billion transactions worth nearly Rs. 29.9 lakh crore. The scale of the ecosystem consequently makes its financial sustainability an increasingly important regulatory concern.
The Zero-MDR Framework
The legal foundation of the zero-MDR framework is contained principally in Section 10A of the PSS Act. The provision prohibits banks and system providers from imposing charges on persons making or receiving payments through electronic modes prescribed under Section 269SU of the Income-tax Act, 1961.
The policy objective behind the framework was to accelerate digital-payment adoption, reduce transaction costs and promote financial inclusion. Zero MDR has particularly benefited small merchants by allowing them to accept digital payments without directly bearing transaction-processing charges.
However, the absence of a charge to the user does not mean that a UPI transaction is costless. Every transaction requires technological infrastructure, banking systems, payment-processing networks, cybersecurity mechanisms, fraud monitoring and continuous capacity expansion.
Who Currently Bears the Cost?
UPI operates through an interconnected ecosystem comprising banks, the National Payments Corporation of India (“NPCI”), payment service providers, third-party application providers and other technology participants. These entities incur costs associated with transaction processing, infrastructure maintenance, cybersecurity, fraud prevention and customer support.
The present model therefore shifts the cost away from the immediate user rather than eliminating it. The ecosystem has historically been supported through banking revenues, commercial arrangements, cross-subsidisation and Government incentives. This creates the central policy problem: a payment can be free to the user without being free to the system. As transaction volumes continue to increase, the financial burden of maintaining the infrastructure becomes increasingly significant.
Government Incentives as an Alternative to MDR
The Government has attempted to address this issue without compromising the zero-MDR model through incentive schemes. For FY 2024–25, the Government approved an incentive scheme of Rs. 1,500 crores for low-value BHIM-UPI person-to-merchant transactions. Under the scheme, eligible transactions up to Rs. 2,000 involving small merchants continued to attract zero MDR, while ecosystem participants received incentives linked to transaction value.
The Government has continued this approach in FY 2026–27, with an allocation of Rs. 2,000 crore for incentives relating to RuPay debit cards and low-value BHIM-UPI transactions. This approach preserves the consumer-facing promise of free digital payments. However, continued reliance upon public funds raises a broader question: should taxpayers indefinitely finance the payment infrastructure used by both small businesses and large commercial enterprises?
The Emerging Proposal for Reintroduction of MDR
The latest policy discussions indicate a possible movement towards a differentiated MDR framework. Recent reports suggest that the Government is considering amendments to the PSS Act to provide greater flexibility for imposing MDR on certain UPI transactions. The objective is reportedly to address the sustainability concerns of banks and fintech companies that bear substantial infrastructure and operational costs.
Importantly, the proposal does not necessarily contemplate imposing MDR uniformly across all UPI transactions. The emerging approach appears to distinguish between large commercial merchants and smaller businesses, while potentially keeping peer-to-peer payments outside the levy. Such differentiation is significant because the policy rationale for zero MDR is not identical across all transactions. A small merchant accepting a low-value payment and a large enterprise processing substantial transaction volume cannot necessarily be treated identically.
Whether a Uniform MDR Model is Appropriate
A blanket reintroduction of MDR could undermine some of the objectives of the existing framework. Small merchants frequently operate on narrow margins and may be disproportionately affected by even modest transaction charges. Such costs could discourage digital-payment acceptance or ultimately be passed on to consumers. At the same time, retaining absolute zero MDR for every category of transaction places the entire financial burden on banks, payment participants and Government-supported incentives, despite large commercial enterprises deriving considerable value from the UPI infrastructure.
A differentiated model may therefore provide a more proportionate solution. Zero MDR could continue for peer-to-peer payments and small merchants, while a regulated MDR could apply to specified large merchants or higher-value commercial transactions.
Competition and Consumer Welfare Considerations
Any reintroduction of MDR must also be examined from the perspective of competition and consumer welfare. UPI’s success has been partly attributable to interoperability and low transaction costs. A new pricing mechanism should therefore remain transparent and competitively neutral and should not disproportionately disadvantage smaller fintech entities.
The distribution of MDR revenues among banks, payment service providers and other participants would also require regulatory clarity. Since UPI operates as an interconnected ecosystem, the revenue generated should support investment in payment infrastructure, cybersecurity and resilience rather than merely creating an additional revenue stream. Further, although MDR may formally be imposed upon merchants, its economic burden may ultimately be transferred to consumers through higher prices or payment-specific charges. Any regulatory framework must therefore consider both the legal and economic incidence of MDR.
Government Subsidy or Merchant-Funded MDR?
The central policy choice is consequently between continued Government subsidy and merchant-funded MDR. Government support remains justified where digital payments serve broader public objectives such as financial inclusion, formalisation of economic activity and reduced dependence on cash. However, permanently subsidising every category of UPI transaction may become increasingly difficult as transaction volumes and infrastructure costs expand.
A hybrid model may therefore be preferable. Government incentives could remain targeted towards low-value transactions and small merchants, while a modest and regulated MDR could be permitted for large commercial transactions. Such a framework would allow the Government to subsidise a specific public-policy objective rather than the entire payment ecosystem.
AMLEGALS Remarks
The emerging debate surrounding UPI and MDR represents an important regulatory issue at the intersection of fintech regulation, payment-system governance, competition and consumer welfare. The reconsideration of the zero-MDR framework reflects the growing recognition that India’s digital-payment infrastructure requires a sustainable economic model. However, a universal return to MDR may not be appropriate. The distinction between small merchants, large commercial enterprises and peer-to-peer transactions is important from the perspective of financial inclusion and proportionality.
A targeted MDR framework, accompanied by continued Government support for low-value transactions, may therefore provide a balanced approach. Ultimately, the sustainability of UPI requires a model in which the costs of maintaining critical digital-payment infrastructure are distributed proportionately among those who derive value from it, while preserving the accessibility and affordability that have made UPI one of India’s most significant digital public infrastructures.
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