MDR Will Apply Only To Merchants, Not UPI Customers, Says Sitharaman

The debate over the Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions intensified on August 6, 2026, after Union Minister of Finance Nirmala Sitharaman clarified that the charge, if introduced, would apply only to merchants and not to customers. She also said that no decision has been taken yet on imposing MDR, as the matter will be decided only after Parliament passes the proposed changes to the law.

Minister Responds To Congress Criticism

Sitharaman’s remarks came in response to Congress leader Jairam Ramesh’s assertion that ordinary people could end up paying more for using UPI if the government moves ahead with the proposal. He argued that the burden of MDR would eventually fall on customers, and questioned the government's view that such a charge is needed to make the UPI system financially sustainable.

Replying on the social media platform X, Sitharaman has clarified that MDR is charged to merchants and not to end users. She also added that the fee would help banks and fintech companies invest more in payment infrastructure, innovation and security, benefiting the overall digital payments ecosystem.

She said the UPI and Services Steering Committee, headed by the National Payments Corporation of India (NPCI), is yet to take a decision on the matter.

Bill Seeks Legal Backing

The Centre has introduced the Taxation and Other Laws (Amendment) Bill, 2026, in Parliament, which seems to have ignited the debate.

The proposed legislation seeks to amend Section 10A of the Payment and Settlement Systems Act, 2007. If passed, the amendment would give the Centre the power to notify which electronic payment methods or transactions will remain free for users.

The Bill does not impose an MDR on transactions on UPI and RuPay card. Rather, it establishes the legal structure to allow the government to change the current zero-MDR policy by issuing a notification in the future.

Commenting on the proposed amendment, Ranadurjay Talukdar, partner and payments sector leader at EY India, said, "This is a significant move that could help the payment industry improve profitability."

He added that the final impact would depend on the payment modes covered under the framework. "P2P (person-to-person) and P2PM (payments to small merchants) are likely to continue being free, as MDR for small merchants could deter digital payments. Large merchants beyond a certain turnover threshold may be expected to pay MDR," he said.

At present, according to the government’s ‘zero-MDR’ policy, merchants aren’t charged MDR for transactions made with UPI and RuPay debit cards.

RBI Governor’s Clarification

The sharp spike in UPI transactions has renewed concerns over the long-term sustainability of the zero MDR model. Banks and payment service providers have argued that maintaining and upgrading digital payments infrastructure involves significant costs.

However, during a press conference following the announcement of the Monetary Policy Committee (MPC) meeting, Reserve Bank of India Governor Sanjay Malhotra did not indicate whether MDR or any other funding model would eventually be introduced. He maintained it is too early to draw any conclusion, as discussions on the proposed law are still underway.

For consumers, there is no immediate change. UPI transactions remain free for both P2P and merchant payments. Any future decision to introduce charges will require a separate policy decision, followed by detailed regulatory guidelines before it comes into effect.