The Indian government has amended the Payment and Settlement Systems Act to prohibit merchant discount rate (MDR) charges on UPI transactions up to ₹2,000, paving the way for MDR to be applied on payments exceeding this limit.
- No MDR charges on UPI transactions up to ₹2,000
- MDR may apply at 0.4% on transactions above ₹2,000
- Banks and fintechs to share MDR revenue under new framework
What happened
The Indian finance ministry issued an official notification specifying that no merchant discount rate (MDR) can be imposed on unified payments interface (UPI) transactions or RuPay debit card payments up to ₹2,000. This notification follows amendments to the Payment and Settlement Systems Act (PSSA) of 2007, allowing the government to set thresholds for MDR exemptions.
Previously, a blanket ban on MDR for all UPI payments was in place to encourage digital payments adoption. Now, payments above the ₹2,000 threshold can be charged MDR fees. The National Payments Corporation of India (NPCI) is tasked with determining the MDR rates and allocation among banks, third-party app providers, and acquiring banks.
Why it matters
The zero-MDR policy introduced in 2020 contributed significantly to the rapid growth of UPI payments, which clocked over 24 billion transactions valued at nearly ₹30 lakh crore in August 2026 alone. However, banks and fintech companies have largely depended on government incentives to cover costs, limiting profitability in the booming payments market.
Reintroducing MDR on higher-value transactions offers a sustainable revenue model to banks and payment firms, addressing concerns raised by a Parliamentary panel about inadequate incentive mechanisms. This is expected to support the long-term financial health of the digital payments ecosystem and incentivize further innovation.
What to watch next
The NPCI and relevant payments committees will finalize the specific MDR charges, reportedly around 40 basis points (0.4%) for UPI transactions exceeding ₹2,000. The structure may allocate 40% of MDR revenue to issuing banks, with the remainder shared between third-party applications like PhonePe and Paytm and acquiring banks.
Market response has been positive, with fintech stocks such as Pine Labs, Mobikwik, AvenuesAI, and Paytm experiencing notable gains following news of the pending MDR framework. Industry stakeholders and consumers will closely monitor the implementation details, fee impact, and potential changes to payment behaviors.