Government May Bring Back UPI Merchant Fee For Large Businesses

The government is examining a proposal to bring back the merchant discount rate, or MDR, on Unified Payments Interface transactions made to large businesses.

The charge was removed from UPI payments in January 2020 to encourage people and merchants to use digital payment methods. Banks and payment companies have since been processing such transactions without charging merchants.

MDR is a fee paid by a merchant to the bank or payment company handling a digital transaction. It is already charged on several card payments, but UPI transactions have remained free for merchants for more than six years.

Under the proposal being discussed, the fee may be limited to businesses with an annual turnover of around Rs 1 crore to Rs 1.5 crore. It may also apply only when the transaction amount is more than Rs 2,000.

No final decision has been taken so far. The turnover limit, transaction amount and fee structure may be changed before the government gives its approval.

Small Merchants May Remain Exempt

The proposed arrangement is expected to protect small traders, local shops and street vendors who receive a large part of their payments through UPI QR codes, according to a recent report by The Economic Times.

Person-to-person money transfers are also likely to remain outside the MDR framework. Payments made to smaller merchants may continue to be free, even if the charge is introduced for larger establishments.

This could mean that a customer paying a neighbourhood shop through UPI may not notice any change. Bigger retailers, online platforms and large businesses, however, may have to pay a fee for certain transactions.

It is not yet clear whether merchants would absorb the cost or pass it on through higher prices or additional charges.

Payment Firms Seek A Revenue Model

Banks, fintech companies and payment industry bodies have been asking the government to restore MDR for large merchants. They say the number of UPI transactions has grown sharply, but the companies processing these payments have limited ways to earn from the service.

The government has been compensating banks and payment companies through an incentive scheme. An amount of Rs 2,000 crore was set aside in the Budget to support free UPI and RuPay debit card transactions.

The industry has argued that the compensation is not enough to cover the growing cost of running the network, maintaining technology systems, handling disputes and preventing fraud.

Before the fee was removed, the UPI merchant charge was capped at around 0.30 per cent per transaction. Whether the same rate will return is not known.

UPI transaction volume has increased from about 20 million in 2016-17 to nearly 242 billion in 2025-26. The value of transactions has also risen from around Rs 0.07 lakh crore to nearly Rs 314 lakh crore.

A limited MDR on large merchants could give banks and payment apps a source of income without affecting small traders and routine UPI transfers.

FAQs 

1. Will all UPI payments attract MDR if the proposal is approved? 

No. The fee may apply only to transactions above Rs 2,000 made to large businesses, though the final rules have not been decided. 

2. Will UPI payments to small shops remain free? 

Small merchants, local shops and street vendors are expected to remain exempt. Person-to-person UPI transfers are also likely to stay free. 

3. Who will pay the proposed UPI merchant fee? 

MDR is normally paid by the merchant to the bank or payment company. It is not yet clear whether large businesses may pass the cost on to customers.