Last week, the Taxation and Other Laws (Amendment) Bill, 2026, was passed in the Lok Sabha, which proposes changes to the Payment and Settlement Systems Act, 2007, that create pathways for fees to be charged on UPI and RuPay debit card payments. Introduced in 2020, the zero MDR (merchant discount rate) policy — MDR is the fee paid to the bank or payment service provider for processing digital transactions — was meant to ensure the widespread adoption of digital transactions by making them affordable and accessible. However, as the 32nd report of the Standing Committee on Finance noted, “the absence of MDR makes the UPI ecosystem financially unsustainable”.
Ensuring the smooth running of the payments ecosystem — in July, 23.6 billion transactions were processed through the UPI platform — entails huge costs. Between 2021-22 and 2024-25, the Union government reportedly handed out Rs 8,730 crore under an incentive scheme for subsidising payments. But this covers only a fraction of the costs. According to the standing committee’s report, the “incentive support constitutes only 11 per cent of the cost incurred by the industry and 14 per cent of the potential MDR collected by the industry”. While concerns have been voiced over charges being levied on UPI — millions of users depend on it — the finance ministry has clarified that as and when MDR charges are brought in, they will be above a particular threshold and on a limited set of merchant transactions. Person-to-merchant (P2M) transactions accounted for 63 per cent of all transaction volumes, but only 29 per cent of value in the first half of 2025. In 2025-26, only 4 per cent of P2M transactions were above Rs 2,000, and these accounted for two-thirds of P2M value. This suggests that while revenue will accrue if fees are levied at a higher threshold, most users will be unaffected. According to a report in this paper, the MDR on credit cards ranges between 1 and 3 per cent of the transaction value and is up to 0.9 per cent for debit cards.
Ensuring seamless digital payments requires investment in the infrastructure. The absence of a steady and sustainable source of revenue could thwart the building of infrastructure required to handle more transactions and customers smoothly. A clear source of revenue could also bring in more players, ushering in competition in a market that is largely duopolistic in nature — two platforms, PhonePe and Google Pay, account for roughly 80 per cent of transactions. An MDR could provide the pathway for a financially sustainable ecosystem.
