The Indian government is moving toward a potential shift in its digital payments policy, with the Finance Ministry proposing legislative amendments that could allow for the reintroduction of the Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions. The proposed changes to the Payment and Settlement Systems Act, 2007, aim to provide the government with the flexibility to levy charges on specific digital payment modes. This development follows years of a zero-MDR regime, which has been in place since January 2020 to encourage the rapid adoption of digital payments across the country.
Under the current proposal, the government seeks to remove the provision that strictly prohibits banks and payment system providers from charging fees on electronic transactions. While the legislative amendment would grant the authority to impose these fees, officials have indicated that the policy is designed to target large merchants rather than individual consumers. Small businesses and everyday peer-to-peer transfers are expected to remain exempt from any such charges, ensuring that the convenience and accessibility of UPI for the general public remain intact.
The push for this policy change stems from concerns regarding the long-term financial sustainability of India's digital payments infrastructure. As UPI usage has surged to over 23 billion transactions per month, banks and payment service providers have faced increasing operational and technological costs. A report by the Parliamentary Standing Committee on Finance in March 2026 highlighted that the absence of a fee-based revenue model could hinder the ecosystem's ability to scale, invest in security, and maintain service quality for the millions of new users expected to join the platform in the coming years.
If the amendment is passed by Parliament, the government will be empowered to issue notifications specifying which transactions may attract MDR. While specific rates have not been finalized, the move represents a strategic effort to balance the need for widespread digital inclusion with the necessity of creating a viable funding model for the nation's payment rails. The public and market participants are now watching for further details on the implementation timeline and the specific thresholds that will define which merchants fall under the new fee structure.