The Indian government’s move to potentially reintroduce merchant discount rate charges on UPI could reshape the country’s digital payments landscape, sparking a pivotal policy debate after recent legislative approval.
India’s debate over whether to bring back merchant discount rate charges on UPI has moved into sharper focus after the Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026 on Thursday. The change does not itself impose a fee, but it gives the government power to decide which digital payment methods remain free and which can carry charges, opening the door to a possible shift in the economics of the country’s fastest-growing payments rail.
An MDR is the charge a merchant pays to accept a digital payment. The customer does not pay extra, because the fee is taken from the merchant’s receipts and shared among the parties involved in processing the transaction. In card payments, that pool typically covers the issuing bank, the acquiring bank, the network and, in many cases, the payment gateway or payment aggregator. Industry explainers from EnKash, Bankopedia and IAS Gyan describe MDR as a long-established feature of debit and credit card payments, where it is used to fund the infrastructure that makes electronic payments work.
UPI has been different since January 2020, when the zero-fee policy for merchants was introduced. That is why any move to reintroduce MDR on UPI would mark a major policy change rather than a routine adjustment. Business Standard reported that estimates in the market point to a possible UPI MDR of about 0.2% to 0.4%, well below typical card charges, and that any levy would probably be aimed at large merchants and transactions of ₹2,000 or more. Mint has also reported that officials are discussing a structure that would spare small businesses and consumers.
For payment companies and banks, the attraction is clear: a fee stream could help fund reinvestment in infrastructure and expansion of the system. Yet the issue remains politically sensitive because UPI has become central to India’s digital payments ecosystem precisely because it has been free for merchants. Canara Bank’s June 2026 guidance on RuPay credit card payments via UPI shows that some UPI-linked card transactions already carry MDR, with rates varying by merchant category and GST added on top, underscoring that the question is not whether fees can exist on the UPI stack, but how broadly they might eventually be applied.
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