Proposed Merchant Discount Rate on High-Value UPI Transactions and Its Policy Implications

The central government has introduced a legislative proposal in the Taxation and Other Laws (Amendment) Bill, 2026 to amend Section 10A of the Payment and Settlement Systems Act, 2007. This amendment creates statutory room to notify charges on specified electronic payment modes, with a proposed Merchant Discount Rate (MDR) ranging from 0.25% to 0.5% on Unified Payments Interface (UPI) transactions exceeding ₹2,000. Official projections indicate this threshold would impact roughly five per cent of UPI transactions by volume while capturing approximately 65% of the total transaction value.

Significance for the UPSC Syllabus

This proposal touches directly upon General Studies Paper III (Indian Economy, mobilization of resources, digital public infrastructure, and financial inclusion). Over the past decade, a zero-MDR policy served as an explicit promotional tool to accelerate digital payments, formalise transactions, and lower reliance on paper currency. Re-imposing transactional charges on payment rails raises fundamental questions concerning digital infrastructure financing, the sustainability of two-sided markets, and potential behavioural shifts back toward cash.

Key Concerns and Background

The proposed amendment brings several economic considerations into focus:

• Two-Sided Market Burden: In electronic payments networks, merchants and customers form interdependent user bases. If high competitive intensity prevents banks and payment service providers (PSPs) from passing merchant charges forward, intermediaries may end up absorbing the costs, potentially depressing long-term investments in system maintenance, cybersecurity, and fraud prevention.
• Incentives for Formalisation: Following the November 2016 demonetisation drive, the zero-MDR framework was instrumental in expanding UPI into the world's most heavily utilized retail digital payment rail. Transitioning informal micro-commerce into recorded digital footprints assists credit appraisal and tax compliance. Levying charges on larger ticket sizes could disincentivise digital adoption at the margin.
• Policy Consistency: Unlike credit cards—where interest and related fees incur 18% Goods and Services Tax (GST)—UPI was built as a zero-cost digital public utility. The move highlights the policy trade-off between generating infrastructure-funding revenues and safeguarding universal digital inclusion.