Unified Payments Interface (UPI) has been central to India’s digital economy, enabling instant, free, and secure money transfers. However, a significant change is on the horizon. The Payments Council of India (PCI) has proposed reintroducing Merchant Discount Rate (MDR) charges on UPI and RuPay debit card transactions starting April 2025. With declining government subsidies for digital payments, the move is intended to create a sustainable financial model for banks and payment service providers. Understanding these developments is crucial for merchants, consumers, and the future of India’s growing cashless economy.
Table of Contents
UPI MDR Charges Could Return in 2025
Topic |
Details |
|---|---|
Proposal |
Reintroduction of MDR charges on UPI and RuPay transactions |
Reason |
Declining subsidies and need for a sustainable payment ecosystem |
Impact on Merchants |
New transaction costs, potential shift back to cash payments |
Impact on Consumers |
Possible price hikes, reduced acceptance of UPI in small stores |
Impact on Providers |
Revenue to support infrastructure, innovation, and fraud prevention |
Expected MDR Rates |
Likely nominal (around 0.3% suggested) |
Official Website |
What is UPI and Why Is It Crucial?
Unified Payments Interface (UPI) was developed by the National Payments Corporation of India (NPCI) to streamline digital transactions across different banks and platforms. It has become a global model for low-cost, real-time payments.
Key Features of UPI
-
Real-time interbank money transfers
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No transaction fees for users or merchants currently
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High-end security with two-factor authentication
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Operates across apps like Google Pay, PhonePe, Paytm, and bank applications
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Facilitated 16 billion transactions worth ₹22 lakh crore in February 2025 alone
UPI’s free model has played a major role in pushing India towards a cashless economy, making digital payments accessible even for small vendors and rural populations.
Were UPI Transactions Always Free?
Initially, UPI transactions were not completely free for merchants. Before January 2020, UPI and RuPay payments attracted a small MDR charge (typically under 1%).
Timeline of UPI Charges
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Before Jan 2020: Merchants paid MDR fees for UPI and RuPay transactions
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Post Jan 2020: MDR charges removed following a government announcement
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2025 Proposal: MDR reintroduction being considered due to reduced subsidies
Understanding MDR and Historical Rates
The Merchant Discount Rate (MDR) is a fee merchants pay to banks and payment processors for handling digital transactions.
MDR Rates Then and Now
Payment Type |
MDR Before Jan 2020 |
Current MDR Rate |
|---|---|---|
Credit Cards |
1% – 3% |
1% – 3% |
Debit Cards |
0.5% – 1% |
0.5% – 1% |
UPI Transactions |
0% |
|
RuPay Debit Cards |
0% |
Merchants saving on MDR encouraged widespread UPI acceptance, but now financial sustainability challenges are emerging.
Why Is There Pressure to Bring Back MDR?
Multiple reasons are driving the call for reinstating MDR charges:
Declining Government Subsidies
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FY24: ₹3,500 crore allocated for MDR compensation
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FY25: Only ₹1,500 crore allocated despite increasing transaction volume
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Estimated ₹10,000 crore required to maintain current service levels
Need for Sustainable Digital Infrastructure
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Billions of transactions require constant cybersecurity, fraud prevention, and system upgrades
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Without MDR, payment providers struggle to invest in innovation and service quality
Fair Competition Among Payment Methods
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Credit and debit card transactions generate revenue
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UPI and RuPay transactions currently do not
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A nominal MDR (e.g., 0.3%) could level the playing field
Possible Effects if MDR Is Reintroduced
Reintroducing MDR charges would impact various players in the digital payment ecosystem:
Impact on Merchants
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New operational costs could be incurred
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Some merchants might increase product prices to offset transaction fees
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Small businesses may prefer cash transactions over digital payments
Impact on Consumers
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Indirect price hikes could make goods and services slightly more expensive
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Limited digital payment options at smaller shops due to cost concerns
Impact on Payment Service Providers
-
Consistent revenue from MDR would support infrastructure upgrades
-
Funds could improve fraud detection, customer service, and technological innovations
FAQs
What is MDR in digital payments?
MDR (Merchant Discount Rate) is a fee merchants pay to banks and payment processors for every digital transaction completed through credit cards, debit cards, UPI, or RuPay.
Was UPI always free for merchants?
No, before January 2020, merchants paid small MDR fees on UPI transactions. The fees were removed following government intervention.
Why is MDR being considered again for UPI?
Declining government subsidies and the need to sustain payment infrastructure are key reasons for considering the return of MDR charges.
How much MDR is expected on UPI transactions?
Although not officially confirmed, industry leaders suggest a nominal MDR of around 0.3% could be implemented.
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