A parliamentary panel has called for the swift introduction of a calibrated merchant discount rate on high-value Unified Payments Interface transactions, intensifying pressure for a revenue model that can support the rapidly expanding payments network without relying heavily on government subsidies.
The Standing Committee on Finance has recommended a tiered framework under which larger merchant transactions could attract a merchant discount rate, or MDR, while person-to-person transfers and payments involving small merchants remain protected. The committee said delays in implementing such a mechanism could leave banks and payment service providers dependent on subsidies that cover only a fraction of operating costs.
The recommendation comes days after Parliament cleared legislative changes creating the legal basis for the government to determine which electronic payment modes must remain free of charges. No MDR rate, merchant category or transaction threshold has yet been finalised, and UPI users will continue to make person-to-person payments without transaction fees.
The government has also indicated that any MDR introduced on UPI would apply only above a specified threshold and would not amount to a blanket charge on merchant payments. The fee would be paid by qualifying merchants rather than customers, while the vast majority of everyday UPI transactions would remain outside the proposed charging structure.
The committee's intervention centres on the economics of operating UPI. It highlighted an estimated annual operational cost of about ₹20,700 crore for the payments ecosystem against a budgetary allocation of ₹2,000 crore for incentives supporting RuPay debit cards and low-value BHIM-UPI transactions. The allocation therefore covers roughly a tenth of estimated costs.
The panel questioned whether continuing to compensate service providers through the budget was the most sustainable approach. It said the allocation required to offset losses under the zero-MDR regime increased the Department of Financial Services' Demand for Grants while leaving a substantial gap between public support and the cost of maintaining the payments infrastructure.
Zero MDR has been a central element of UPI's growth strategy since January 2020. Merchants currently receive the full value of qualifying UPI payments rather than surrendering a portion as a processing fee. Before the zero-MDR regime took effect, UPI person-to-merchant transactions could attract MDR of up to 0.30% of transaction value.
The policy helped accelerate merchant acceptance and consumer adoption but removed a direct revenue stream for banks and payment companies. Industry participants have argued that transaction processing, fraud monitoring, cybersecurity, customer support and network expansion require substantial continuing investment as UPI volumes climb.
UPI now handles more than 23 billion transactions in a month, with monthly transaction value approaching ₹30 lakh crore. Its scale has transformed the payments market and made the economics of processing even a fraction of those transactions commercially significant.
One proposal being discussed would apply MDR only to transactions above a specified value and potentially limit it further to larger merchants. Industry proposals have included rates in the range of roughly 0.3% on qualifying UPI payments, though the government has stressed that no final framework has been decided. Other approaches could link eligibility to merchant turnover rather than transaction size alone.
High-value transactions form a relatively small part of UPI payment volumes but represent a much larger share of total value. That makes them attractive as the foundation for a tiered model because policymakers could generate revenue for payment providers while leaving routine purchases and small businesses largely untouched.
The Finance Ministry has said the UPI and Services Steering Committee headed by the National Payments Corporation of India would consider the MDR framework following the legislative changes. That process will determine whether a fee is introduced and, if so, the applicable threshold, merchant categories and rate structure.
Payment companies and banks have long sought a more predictable commercial model for UPI. The Payments Council of India had proposed a 0.3% MDR for payments to large merchants, arguing that the zero-MDR structure had left ecosystem participants absorbing mounting processing and infrastructure expenses.
