India’s move to potentially introduce merchant discount rates on UPI transactions has sparked debate over the future of free digital payments, as policymakers navigate uncertainties around fee structures and distribution.
India’s move to tidy up the legal framework for digital payments has stirred fresh debate over whether Unified Payments Interface users could one day face merchant charges, even as the government insists ordinary customers will stay exempt. Finance minister Nirmala Sitharaman told the Rajya Sabha that no merchant discount rate, or MDR, has been finalised, and the Bill now before parliament does not itself set a fee or identify which merchants would eventually pay it.
The Taxation and Other Laws (Amendment) Bill, 2026 would amend the Payments and Settlement Systems Act, giving the central government power to specify electronic payment modes by notification and barring banks or system providers from levying charges on people making or receiving payments through those channels. In practice, that leaves the operating rules of any future UPI charge to be worked out later, rather than fixed in the legislation itself.
That uncertainty has prompted questions about who, if anyone, would fall within a future MDR regime. The government has said any fee would be limited to certain merchant transactions above a threshold and would be nominal, lower than the rates typically charged on debit and credit cards. But it has not said whether eligibility would be based on turnover, transaction value, merchant category or some combination of those tests. Reports in Moneycontrol, Mint and Outlook Business suggest policymakers are considering a narrower framework aimed at large merchants, with transaction thresholds around ₹2,000 and turnover cut-offs for bigger businesses.
The practical design of such a charge is equally unresolved. The Bill does not say whether MDR would be a percentage of the payment value, a flat charge or a capped amount, nor does it spell out how revenue would be shared between banks, payment-service providers, aggregators, the National Payments Corporation of India and other participants. The government says any change is meant to support the long-term sustainability of UPI, including spending on cybersecurity, fraud prevention and infrastructure, but it has not explained how those costs would be recovered.
Other open questions would matter just as much for merchants as for banks. The draft does not say whether businesses could pass the cost on through surcharges, changes to discounts or minimum-spend rules, even though the government has insisted consumers will not pay for UPI and that person-to-person transfers will remain free. It also leaves unanswered how refunds, reversals, failed payments and disputes would be handled if MDR had already been charged, making clear that the Bill is only the first step in a much larger policy decision.
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