UPI has made digital payments in India easy, fast, and almost free of any additional cost. But now, a major change could be on the way. Parliament passed the Payment and Settlement Systems (Amendment) Bill, 2026, on August 6, 2026, giving the government the legal authority to impose a Merchant Discount Rate (MDR) on UPI and RuPay debit card transactions in the future.
However, Finance Minister Nirmala Sitharaman has clarified in the Lok Sabha that the burden of MDR will not fall on customers, but on merchants. According to the government, the purpose of this amendment is to create the legal framework for now. When MDR will be implemented, what its rate will be, and which transactions it will apply to will be decided later through a notification.
Why is the Government Considering Bringing Back MDR?
The government says that under the zero-MDR system that has been in place for years on UPI and RuPay, banks, payment service providers, and other digital payment companies do not have a permanent revenue source to maintain, secure, and expand the network. As the number of digital transactions has increased, the cost of operating the entire ecosystem has also risen. In such a situation, relying only on government incentives may not be practical in the long term.
For this reason, the government has created the legal basis for imposing MDR by amending the Payment and Settlement Systems Act. This could help create a sustainable revenue model for the digital payment ecosystem in the future, if needed. According to reports, the move is also being seen as an attempt to create a more balanced competitive environment between UPI and other card networks.
On Which Transactions Can MDR Be Applied?
For now, the government has not decided when MDR will be applied to UPI or what its rate will be. Earlier proposals considered options such as imposing an MDR of 0.3% to 0.5% on UPI transactions above Rs 2,000 and transactions involving large merchants.
However, Finance Minister Nirmala Sitharaman has clarified that the burden of MDR will not fall on customers, but only on merchants. She has also said that no final decision has been taken on implementing MDR. The amendment bill passed by Parliament only gives the government the legal authority to implement MDR in the future. The final rules, rate, and scope of application will become clear only after the government issues a notification.
Why Did the Rs 2,000 Limit Come into Discussion?
The Rs 2,000 limit came into discussion because the initial proposals considered at the government level included the option of imposing MDR on high-value UPI transactions. According to reports, UPI transactions above Rs 2,000 account for only about 4% of the total number of transactions, but around 67% of the total transaction value comes from these transactions.
For this reason, it was considered that if MDR were to be imposed, including high-value transactions would have a limited impact on most small consumers, while creating an additional revenue source for the digital payment system. However, this is still only a proposed option and not the final rule.
What Impact Could This Have on the Digital Payment Industry?
If MDR is implemented in the future, banks, payment service providers, and digital payment companies could get a new revenue source. This could make it easier to invest in the maintenance of payment networks, cybersecurity, and new technologies.
According to Reuters, brokerage firm Jefferies estimates that the proposed model could generate additional revenue of Rs 5,000 crore to Rs 10,000 crore every year. Reports have also suggested that this could benefit companies such as Paytm, Pine Labs, and the banking ecosystem, as their direct earnings from UPI remain limited under the current zero-MDR system.
What’s Ahead?
The biggest change is that Parliament has passed the Payment and Settlement Systems (Amendment) Bill, 2026, giving the government the legal authority to impose MDR on UPI and RuPay transactions. However, this does not mean that MDR has been implemented immediately.
The government will now have to issue a separate notification to decide when MDR will be implemented, what its rate will be, which merchants it will apply to, and which types of transactions will come under its scope. At the same time, the government has made it clear that even if MDR is implemented, its burden will not be directly on customers but on merchants.
Disclaimer: This article is for educational and informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The companies mentioned are cited as examples within the context of market developments. Investors are advised to conduct their own due diligence and consult their financial advisor before making any investment decisions.
Investments in the securities market are subject to market risks. Read all related documents carefully before investing.
