Context
The Taxation and Other Laws (Amendment) Bill, 2026 proposes amendments to the Payment and Settlement Systems Act, 2007 to create a legal framework for permitting charges on specified digital payment transactions, including UPI.
The proposal could mark a shift from India’s zero-MDR model. However, the Bill itself does not impose an immediate charge on every UPI transaction. The applicable rate, transaction threshold and categories of merchants would depend on the final regulatory framework and subsequent notifications.
The proposal has renewed the debate over how to finance India’s rapidly expanding digital-payment infrastructure while preserving UPI’s affordability and widespread adoption.
Understanding Merchant Discount Rate
Merchant Discount Rate (MDR) is a fee associated with processing digital payments. It is generally paid by the merchant to banks and other payment-system participants for services such as transaction processing, settlement and payment infrastructure.
UPI has operated under a zero-MDR framework since 2020, with the government supporting the ecosystem through incentives. However, the rapid expansion of UPI has increased the requirements for technology infrastructure, cybersecurity, fraud prevention and settlement systems.
A regulated MDR framework could therefore provide an additional revenue source for maintaining the payment ecosystem. Reports have discussed applying MDR to selected higher-value merchant transactions, but the reported rates and thresholds should not be treated as final until formally notified.
Coverage and Impact
The policy discussion is aimed at avoiding a blanket charge on all UPI payments. The proposed approach focuses on larger merchants and higher-value commercial transactions, while routine low-value payments and person-to-person transfers are expected to remain outside the proposed charge structure.
MDR is a merchant-side payment-processing charge, rather than a direct tax on consumers for using UPI. The final framework would determine the exact categories of merchants and transactions covered.
Impact of the Zero-MDR Model
The zero-MDR framework helped accelerate digital-payment adoption by removing a transaction cost for merchants. However, the same model has created a financing challenge as UPI volumes and the cost of maintaining the network have grown rapidly.
Government incentives have supported banks and payment-system participants, but the continued expansion of the ecosystem has renewed questions about the long-term sustainability of relying primarily on public support.
A targeted MDR could generate revenue from higher-value commercial payments while retaining free or low-cost access for smaller transactions. The key challenge is to ensure that additional charges do not discourage merchants from accepting digital payments or encourage a shift back towards cash.
International Trade Dimension
The proposal also has relevance to India’s digital-trade relations with the United States. The U.S. Trade Representative (USTR) has raised concerns about aspects of India’s digital-payment ecosystem and the competitive position of U.S. electronic-payment providers.
These concerns provide an international context to the debate over India’s payment-system regulations. However, the proposed MDR framework should not be attributed solely to U.S. trade pressure. It also addresses a domestic concern regarding the financial sustainability of a rapidly expanding payment infrastructure.
The issue therefore illustrates the growing overlap between domestic digital-payment policy and international trade negotiations.
Significance
The proposed framework raises a broader question about financing digital public infrastructure. Keeping UPI free has supported financial inclusion and encouraged widespread digital-payment adoption, while maintaining a large payment network requires continuous investment.
A carefully designed MDR system could provide additional resources for payment infrastructure, security and innovation without imposing costs on ordinary users. Conversely, excessive charges could raise merchants’ costs and weaken the advantages that have contributed to UPI’s rapid adoption.
The policy must therefore balance financial sustainability, affordability, digital inclusion and innovation.
Way Forward
India needs a targeted and transparent pricing framework that protects small merchants and low-value transactions while creating a sustainable revenue mechanism for larger commercial payments.
Any MDR regime should clearly define the transactions covered, prevent disproportionate costs from being passed on to consumers, and preserve competition among payment providers. Continued investment in cybersecurity, payment infrastructure and regulatory capacity will also be essential as digital transactions expand.
Conclusion
The proposed MDR framework represents a possible shift from a fully subsidised zero-MDR model towards selective monetisation of digital payments. Its success will depend on whether India can make UPI financially sustainable while preserving its core strengths of affordability, accessibility and digital inclusion.
Frequently Asked Questions
Q1. What is the proposed change regarding UPI?
Ans: The proposed amendment creates a legal framework for permitting charges such as MDR on specified digital-payment transactions. It does not, by itself, impose an immediate charge on every UPI transaction.
Q2. What is Merchant Discount Rate (MDR)?
Ans: MDR is a payment-processing charge associated with digital transactions. It is generally borne by the merchant and compensates payment-system participants for processing and related services.
Q3. Will all UPI users be charged under the proposal?
Ans: No blanket charge on all users is proposed in the framework described. The policy discussion focuses on selected merchant transactions, particularly higher-value commercial payments.
Q4. Why is MDR being considered for UPI?
Ans: UPI’s rapid expansion has increased the cost of maintaining payment infrastructure, cybersecurity and settlement systems. MDR is being considered as one possible way to improve the ecosystem’s financial sustainability.
Q5. Is the proposed MDR rate final?
Ans: No. Reported rates and transaction thresholds are proposals under consideration. The applicable structure would depend on the final regulatory framework and subsequent notifications.
Q6. How is the proposal linked to India-U.S. trade relations?
Ans: The USTR has raised concerns about India’s digital-payment ecosystem and the competitive position of U.S. payment providers. However, this does not establish that the proposed MDR framework was introduced because of U.S. pressure.
Q7. What is the main policy challenge?
Ans: India must balance the financial sustainability of UPI with affordable digital payments. A targeted system should generate revenue without undermining merchant adoption, consumer access or digital inclusion.
