Large Merchants May Have To Pay MDR On UPI Transactions Above Rs 2,000

The Centre is considering reintroducing a merchant discount rate (MDR) on UPI transactions of Rs 2,000 and above accepted by large merchants. The proposal is intended to help banks and payment service providers recover a part of the growing costs of maintaining and expanding digital payment infrastructure. If approved, the MDR will be capped at 0.5 per cent of the transaction value, according to a news report by the Financial Times.

A final decision on the proposal is expected within the next month, according to sources.

Small Merchants Likely To Be Outside The Levy

Under the proposal, merchants with an annual turnover of up to Rs 1.5 crore are expected to remain exempt from MDR, irrespective of the transaction amount. The government believes larger businesses are in a better position to absorb the additional cost or pass it on to customers, while smaller merchants may not have the same flexibility.

The proposed change is expected to affect only a small share of UPI payments. According to FY26 data, transactions of Rs 2,000 and above account for only 4 per cent of person-to-merchant (P2M) UPI transactions. Around 86 per cent of such transactions are below Rs 500, while the remaining 10 per cent fall in the Rs 501 to Rs 2,000 range.

Industry data also indicates that most merchants accepting digital payments are small businesses. According to the Payments Council of India (PCI), around 60 million merchants across the country accept digital payments, and nearly 90 per cent of them have an annual turnover of up to Rs 20 lakh.

Why The Government Is Considering The Move

The government had removed MDR on UPI and RuPay debit card transactions from January 2020 to encourage digital payments and increase merchant acceptance. Before the change, merchants paid an MDR of less than 1 per cent on UPI and RuPay debit card payments.

Other digital payment methods continue to attract merchant charges. Credit card transactions generally carry an MDR of around 2 per cent, while non-RuPay debit card transactions attract about 0.9 per cent.

To compensate payment service providers after the removal of MDR, the government currently provides an incentive of 0.15 per cent on UPI transactions below Rs 2,000. However, the Payments Council of India has maintained that this support is not enough to meet the industry's rising costs.

Earlier this year, the Department of Financial Services had informed a Parliamentary panel that the government incentive covers only around 11 per cent of the industry's operating costs and about 14 per cent of the potential MDR revenue that could have been earned if merchant charges had continued.

UPI Records Strong Growth

UPI has become India's largest retail digital payments platform over the past decade. Annual transaction volumes have increased from 20 million in FY17 to more than 241.62 billion in FY26. Total value of transactions rose from Rs 7,000 crore to around Rs 314 lakh crore, during the same period, indicating the rapid expansion of digital payments across the country.