This follows a zero-MDR policy implemented in January 2020, which, while promoting digital payments, has significantly impacted revenue streams within the UPI ecosystem.
The Finance Ministry has told a Parliamentary panel that two options related with merchant discount rates (MDR) are being considered to sustain the UPI (Unified Payment Interface) and reduce the burden on government exchequer. Meanwhile, the panel cautioned that delay in operationalising enabling statutory provision for levying MDR on high-value transaction might have serious repercussion.“Given the sustainability of the UPI ecosystem and the burden on the Government exchequer, the Department is currently exploring two options. First, examining the feasibility of restoring MDR for certain high threshold transactions/merchants; and second, a tiered incentive structure to phase out the government support in the next few years,” the Financial Services Department of the Finance Ministry said in a written submission to the Standing Committee on Finance.From January 2020, zero MDR was announced on all UPI (P2M) transactions to accelerate digital payment adoption and encourage a shift from cash to digital. In its submission, the department said that the zero MDR policy had eliminated the core revenue streams for the UPI ecosystem. To mitigate this and also to encourage banks and other ecosystem participants to promote digital payments, the government has been implementing the incentive scheme.Accordingly, for FY 2026-27, a budget provisioning of ₹2,000 crore was made as part of BE 2026-27, against an estimated cost of ₹20,700 crore incurred by the industry (i.e., cost of ₹1.38 per transaction multiplied by total P2M transactions of 15,000 crore recorded last year). Further, it is submitted that the incentive is paid on reimbursement mode only after the transactions have been completed and data is submitted by the banks.Enabling provisionLast week, Parliament approved amendment in the Payment and Settlement Act as part of the Taxation and Other Laws Amendment (ToLA) Bill). This gives enabling provision to the government to notify list of electronic modes of payment to be exempted from any charge. Excluded modes will attract MDR for which threshold and rates etc will be notified. Finance Minister Nirmala Sitharaman has already clarified that no charge to be levied on consumers and small businesses.Earlier, the Committee had said that allocation of ₹2,000 crore budgetary support to offset zero-MDR losses needlessly inflates the overall demand for grants of the department, while covering barely 10 per cent of actual operational costs. “The committee had, therefore, recommended that the department explore a self-reliant, tiered revenue mechanism to ensure financial sustainability without perpetually straining the exchequer,” it said.Now, in the action taken report, the committee noted that, in pursuance of their earlier recommendation emphasising the imperative of a viable revenue model, legislative enabling provisions for a tiered MDR structure have been brought forward. However, the committee “remain deeply concerned by the staggering mismatch between the ₹2,000 crore allocation and the industry’s estimated operational cost of ₹20,700 crore.”Further, it said that while statutory enablement now exists to permit calibrated MDR on high-value transactions, “any delay in notifying and operationalising this framework leaves payment service providers heavily dependent on inadequate subsidies, thereby threatening critical investments in cyber security, fraud prevention, and network infrastructure.”Published on August 12, 2026
