The Finance Ministry has proposed amendments to laws related to digital payments. This could lead to the reintroduction of MDR (Merchant Discount Rate) on UPI payments in the future. Let’s understand what impact this decision will have on common users, shopkeepers, and the banking system.
Q1: Which law has the Finance Ministry proposed to change, and what will change as a result?
Ans: The Finance Ministry has proposed removing or amending Section 10A of the Payment and Settlement Systems Act, 2007. According to a Moneycontrol report, this section prevents banks and payment companies from charging any fee on UPI and other digital payments. After the change, the government will have the legal authority to decide which digital payment modes should be free and which modes would be chargeable.
Q2: Does this mean charges will be applied immediately for using UPI?
Ans: No, this amendment does not propose to levy charges on UPI payments immediately. This step only provides the government a legal framework to make rules and policies for the future. The government can decide and notify regarding which UPI payments will be free and which aren’t.
Q3: What is MDR, and if it is implemented, who will be affected?
Ans: MDR is the fee that a merchant pays to banks and payment service providers such as PhonePe, Google Pay, and Paytm for processing digital transactions. If MDR is re-implemented, its impact will be on merchants and the payment ecosystem. Common citizens will not have to bear the cost.
Q4. When was MDR removed from UPI and RuPay cards and why?
Ans: The government made MDR rates zero on UPI and RuPay debit card transactions in January 2020. This was done to promote India’s digital payments and strengthen the cashless economy. Since then, UPI payments have expanded rapidly in the country.
Q5. Why does the government want to make changes in the law?
Ans: Running the UPI ecosystem for free is proving financially challenging. Recently, in March, the Parliamentary Standing Committee on Finance also expressed concern about this. The committee had said that the zero-MDR policy is causing losses to the payment industry and banks. A sustainable revenue model is extremely necessary to compensate for this.
Q6. How much incentive does the government currently give to banks and payment companies?
Ans: The government has allocated an incentive budget of ₹2,000 crore to support RuPay debit cards and low-value BHIM-UPI merchant transactions for the financial year 2026-27. This incentive scheme was started in FY2021-22. However, the parliamentary committee noted that this amount covers only a very small portion of the payment industry’s actual costs.
Q7. What is the main objective of this legal amendment?
Ans: The main objective of this amendment is to balance two things. On the one hand, maintaining an affordable and easy-to-use digital payment system; on the other hand, keeping the UPI ecosystem (banks, fintech companies) financially strong and sustainable.
Q8. What is likely to happen in the future?
Ans: The government will review the situation after the amendment is passed. It is speculated that a nominal MDR may be implemented phase-wise for large merchants or high-value transactions. At the same time, small shopkeepers and common consumer payments will be free.
Knowledge Part: ‘Know What is MDR?’
Whenever you make a payment at a shop by scanning a card or UPI, banks, payment gateways, and software companies incur costs to process that transaction securely. The fee charged from the merchant in exchange for this service is called ‘Merchant Discount Rate’ (MDR).
Useful Tip for Readers
Common users need not worry. Even if MDR returns in the future, according to the rules, the merchant has to pay this charge, not the customer. Additionally, your personal UPI transfer, i.e., person-to-person, will remain completely free.
