The Finance Ministry does not expect the introduction of a 0.4 per cent Merchant Discount Rate (MDR) on select UPI transactions above Rs 2,000 to push people towards cash payments, according to a PTI report quoting sources.
The MDR, which will take effect from October 15, will apply to person-to-merchant UPI transactions above Rs 2,000. According to the sources cited by PTI, only around 4 per cent of total UPI transaction volume will be affected by the levy.
The Finance Ministry also expects the move to have little impact on the use of UPI, noting that transactions through RuPay debit cards will remain free irrespective of the transaction amount, the report said.
The ministry is preparing a monitoring mechanism to ensure that merchants and payment service providers do not pass the MDR burden on to consumers, PTI reported. It has also begun discussions with payment aggregators and other stakeholders in the UPI ecosystem to sensitise them about the new charges.
The sources cited by PTI said the levy is also unlikely to have a significant inflationary impact. GST applicable on MDR would largely be offset through input tax credit, limiting its impact on the overall cost of goods and services, they said.
Various transactions have been placed under specialised categories, and the ministry does not anticipate any significant impact from GST on MDR, according to the report. Any unresolved issues relating to GST on MDR could be considered by the GST Council, the sources said.
The 0.4 per cent MDR is being introduced as part of a framework aimed at creating a sustainable revenue model for the digital payments ecosystem. MDR is the fee paid by merchants to payment service providers for processing digital transactions.
Under the new structure, a 0.4 per cent MDR will apply to person-to-merchant UPI payments above Rs 2,000, with the charge to be borne by merchants rather than consumers. The fee will be capped at Rs 300 for transactions of Rs 75,000 or more.
Payments between individuals and most everyday merchant transactions will continue to remain free. Essential services such as railways, telecom, fuel and insurance will attract a flat Rs 5 fee on transactions above Rs 2,000, while capital market transactions, including mutual funds and stockbroking, will attract an MDR of 0.02 per cent, capped at Rs 300.
Small merchants collecting up to Rs 1 lakh a month through UPI QR codes will be exempt from the new charge. According to officials cited in the report, the exemption covers around 96 per cent of all merchant transactions.
On the rationale for fixing the MDR at 0.4 per cent, the sources cited by PTI said similar charges are prevalent in several countries and studies have indicated that the rate is sustainable.
The National Payments Corporation of India (NPCI), which operates the UPI platform, issued a circular on September 15 introducing MDR on specified UPI transactions. The move is aimed at creating a sustainable revenue framework for digital payments, according to the circular.
The new framework will also include a dedicated fund to promote UPI usage among small merchants, with 5 per cent of total MDR collections being contributed to the fund. The initiative is intended to expand UPI acceptance and encourage continued digital payment adoption among small businesses.
The Finance Ministry has also rejected allegations that pressure from the US influenced the decision to introduce the MDR.
The Department of Financial Services (DFS), in a post on X, said the September 15 NPCI circular does not give international credit cards an advantage over RuPay on UPI.
The clarification came in response to observations in the US Trade Representative's (USTR) 2026 National Trade Estimate Report on the inability of US electronic payment service providers to participate in the UPI ecosystem, including credit transactions on UPI, on a level playing field with RuPay.
The DFS said the latest NPCI circular allows credit transactions on UPI only through RuPay credit cards, describing this as a policy intended to make RuPay the preferred credit card among Indian users.
It rejected allegations that the MDR was introduced under external pressure, calling the claim "patently false and misleading".
The clarification came after Opposition parties, including the Congress, alleged that the government had succumbed to US pressure while deciding to impose the MDR on select UPI transactions above Rs 2,000.
The USTR's 2026 report had said the US continued to raise concerns over policies governing electronic payment services in India that it believes favour domestic suppliers over foreign providers. It also flagged the inability of US electronic payment service providers to participate in the UPI ecosystem, including credit transactions, on a level playing field with RuPay.
(With inputs from PTI)
