NEW DELHI/ SHIMLA: The Centre’s new UPI framework signals a gradual shift towards monetising digital payments, with the government allowing Merchant Discount Rate (MDR) on selected high-value merchant transactions while insisting that ordinary users and small merchants will remain protected.
The Finance Ministry said on Tuesday that UPI will continue to be free for all person-to-person transactions and that about 96 per cent of merchant transactions will remain outside the MDR regime.
However, a 0.4 per cent MDR will now apply to specified merchant payments above ₹2,000, with a ceiling of ₹300 for transactions of ₹75,000 and above.
The move is significant because UPI, which was built and promoted as a low-cost digital public payment infrastructure, is now acquiring a revenue-generating layer.
The government says MDR is not a tax or a charge collected by it, but a fee distributed among banks, payment service providers and UPI application providers.
Yet the introduction of charges on a segment of transactions marks a clear departure from the completely free merchant-payment model that helped UPI expand rapidly.
The immediate burden is not supposed to fall on consumers. The Finance Ministry has advised banks to ensure that merchants do not pass MDR on to customers, while UPI application providers have been prohibited from imposing platform fees or hidden charges.
But the policy could still alter user and merchant behaviour over time. If merchants begin factoring the additional payment cost into prices, or encourage customers to use cash or other payment methods, the cumulative effect could weaken the incentive for digital payments, particularly in sectors where margins are already thin.
The government has tried to ring-fence small businesses. Street vendors, neighbourhood shops and other small merchants receiving up to ₹1 lakh a month through UPI QR codes under the P2PM category will continue to get zero MDR. Payments up to ₹2,000 will also remain free for merchants.
The revenue net is instead being cast over larger merchant transactions. Essential sectors such as railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat ₹5 MDR on transactions above ₹2,000, while capital-market transactions will carry an MDR of 0.02 per cent, capped at ₹300.
The government is also creating a fund financed with an amount equivalent to 5 per cent of total MDR collections to promote UPI adoption among small merchants.
The stated objective is to use revenue from larger transactions to strengthen payment infrastructure, including in rural and semi-urban areas.
The larger question, however, is whether today's limited MDR will remain limited. UPI's extraordinary growth has been driven partly by the perception that digital transactions are free, convenient and universally accessible.
Once a monetisation mechanism is established, concerns could emerge over whether charges will gradually expand to more categories or whether merchants will ultimately pass the cost to consumers.
The Centre has stressed that 70 per cent of UPI's total transaction value, represented by person-to-person payments, will remain outside the MDR framework. It also says MDR will currently affect only around 4 per cent of merchant transactions.
For now, therefore, the government is selling the change as a sustainability measure rather than a new tax.
But the policy also opens a new economic pathway: UPI is no longer being treated only as digital public infrastructure; parts of its enormous transaction ecosystem are now being positioned to generate revenue.
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