UPI's Zero-MDR Era May Be Nearing a Turning Point

Merchant Discount Rate, or MDR, is the fee a merchant pays each time a customer pays digitally, whether by card or through a payment app. Banks and payment companies charge it to cover the cost of running the systems that move that money instantly and securely. Debit and credit cards have always carried this fee. UPI never has. Since January 2020, the government made UPI transactions free for merchants, and that decision is a big part of why India's real time payments system grew into the largest in the world by transaction volume.

That zero MDR era may be nearing a turning point. The Lok Sabha recently passed the Taxation and Other Laws Amendment Bill, 2026, creating a legal framework that would allow the government to decide which digital payment methods remain exempt from Merchant Discount Rate (MDR). Once the Bill becomes law, the government can notify a negative list of payment modes that will continue to remain MDR-free, while payment modes outside that list could become eligible for MDR if charges are notified. The Finance Minister has already clarified that any such fee would apply only to merchants and not to end users and that no final decision has been taken yet.

Media reports citing government sources suggest the levy under discussion could fall between 0.25% and 0.4%, likely applied to merchant transactions above ₹2,000. This range hasn't been officially confirmed by the RBI or the Finance Ministry, so it should be read as a reported estimate rather than a settled number, but it gives a useful sense of scale for what's on the table.

Banks have effectively run UPI's merchant side as a cost centre since 2020, absorbing infrastructure and processing expenses without any fee to offset them, meaning every merchant transaction processed has added to their costs without adding to their revenue. Even the lower end of the reported range, 0.25% on transactions above ₹2,000, could generate roughly ₹17,416 crore a year across the sector, going by recent monthly transaction data. At the upper end of 0.4%, that figure would scale to somewhere in the region of ₹27,800 crore. For banks with a sizeable digital payments book, this would turn UPI from a volume heavy, margin light business into one with a real fee income component attached.

Payment aggregators and fintech platforms, the app layer merchants actually transact through, are in much the same boat. An MDR in this range would let them start recovering costs they've carried for years, though how much of that benefit actually reaches them versus banks depends on how any fee eventually gets split and that detail hasn't been worked out yet. If anything, this is the segment most exposed to the outcome, since UPI volumes sit at the core of these platforms' business models in a way they don't for larger, more diversified banks.

Merchants sit on the other side of this. One reported model would apply MDR only to transactions above ₹2,000 made to businesses with annual turnover exceeding ₹1.5 crore, meaning smaller merchants below that threshold could stay exempt altogether. If that structure holds, the real burden falls on larger, high-turnover businesses rather than small shopkeepers and street vendors. Industry bodies have raised a related concern, though: a turnover cutoff draws a hard line where the underlying economics are actually quite similar on both sides of it. A business just above ₹1.5 crore in turnover isn't necessarily better cushioned or more profitable than one just below it. Officials have said the fee itself would likely be small, but for businesses already running on thin margins, even a small new recurring cost changes the math in a way it simply wouldn't for a bigger retailer with more financial cushion.

For retail investors, the point isn't that MDR is coming, it's that this has stopped being a purely hypothetical debate. A reported rate range now exists, even if unconfirmed, giving banks and payment platforms a genuinely plausible path to new fee income, while leaving merchants to absorb the other side of it. Nothing is finalized, and the steering committee's decision is still pending, but the range under discussion explains, in fairly concrete terms, why every part of this ecosystem has real skin in the game.

By Srishti Mendiratta | SEBI-Registered Research Analyst – INH000024295

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