The Unified Payments Interface (UPI), which has revolutionized digital transactions in India, might soon see a major shift as industry players push for the reintroduction of the Merchant Discount Rate (MDR). The Payments Council of India (PCI) has formally proposed reinstating MDR charges on UPI and RuPay debit card transactions, a move that could have significant implications for businesses and consumers alike.
Why is UPI No Longer Free?
UPI has become India’s preferred mode of digital payments, facilitating over 16 billion transactions in February 2025 alone, amounting to nearly ₹22 lakh crore. However, the current financial model that supports free UPI transactions is under strain due to declining government subsidies.
Understanding UPI and MDR
UPI is an instant digital payment system that allows seamless interbank transactions. Since its inception, it has played a crucial role in India’s transition towards a cashless economy. Initially, UPI transactions were subject to MDR charges—fees merchants pay to banks for processing digital payments.
To promote digital payments, the Indian government eliminated MDR fees on UPI and RuPay transactions starting January 1, 2020. This meant that banks and payment service providers (such as Google Pay, PhonePe, and Paytm) had to process transactions without earning any revenue from merchants. The government compensated them partially to offset operational costs.
MDR is a fee, typically ranging from 1% to 3% on credit and debit card transactions, paid by merchants to banks. In the case of UPI, this fee was removed, making transactions free for merchants. However, industry experts now argue that reinstating MDR is essential for maintaining and expanding UPI’s infrastructure.
Why is the Industry Demanding MDR’s Return?
The industry’s call for reinstating MDR is driven by financial sustainability concerns. Previously, the government provided financial incentives to cover transaction costs. However, these incentives have been drastically reduced—from ₹3,500 crore in FY24 to ₹1,500 crore in FY25—leaving a funding gap for maintaining UPI’s digital payment ecosystem.
The industry estimates that sustaining and expanding UPI services requires an annual investment of around ₹10,000 crore. Without a steady revenue stream, banks and fintech companies struggle to invest in innovation, cybersecurity, and IT infrastructure.
Proposed MDR Charges and Their Impact
The PCI has suggested introducing a 0.3% MDR charge on UPI and RuPay transactions, applicable only to large merchants who already pay MDR on other payment platforms. The objective is to create a level-playing field across digital payment methods and ensure sustainable growth.
If the government approves this proposal, the impact on merchants and consumers could be significant. Here’s what might happen:
1. Price Increase for Consumers: Merchants could pass on the MDR cost to consumers, either by raising prices or adding a surcharge on digital payments.
2. Shift Towards Cash Transactions: If merchants find MDR charges burdensome, they may encourage customers to use cash, potentially slowing down India’s digital economy.
3. Better Infrastructure and Services: On the flip side, MDR charges would ensure continuous investment in payment infrastructure, leading to improved security, innovation, and reliability in UPI transactions.
