🗞️ Why in News The Ministry of Finance proposed, in reports on August 3, 2026, amending Section 10A of the Payment and Settlement Systems Act, 2007, to replace the blanket statutory prohibition on Merchant Discount Rate for UPI and RuPay debit transactions with a framework allowing the Centre to notify which payment modes remain exempt.
What MDR Is, and What Changed in 2020
Merchant Discount Rate (MDR) is the fee a merchant pays to accept a digital payment, shared among the acquiring bank, the issuing bank and the payment network. It is the revenue that funds payment infrastructure: fraud systems, dispute resolution, settlement rails and the acquiring business that signs merchants up.
| Period | Regime |
|---|---|
| Before January 2020 | MDR applied to UPI and RuPay debit transactions, at regulated rates |
| From January 2020 | Section 10A of the Payment and Settlement Systems Act, 2007 imposed a statutory zero-MDR requirement on UPI and RuPay debit card transactions |
| Proposed now | Replace the blanket statutory bar with an enabling provision letting the Centre notify which modes stay MDR-exempt |
The Reported Contours of the Proposal
| Element | Detail |
|---|---|
| Merchants expected to remain exempt | Annual turnover up to Rs 1.5 crore |
| Proposed cap on large-merchant UPI MDR | Not above 0.5 per cent of transaction value |
| Mechanism | Executive notification rather than statutory prohibition |
The enabling legislation was reported as being prepared at the time of this edition; the proposal, not an enacted change, is what is described here.
The Underlying Policy Problem
Zero-MDR achieved its intended objective. Removing the merchant’s cost of acceptance was decisive in driving UPI adoption to a scale unmatched anywhere, particularly among small merchants for whom even a modest per-transaction fee is a real deterrent.
But a payment system has running costs regardless of whether anyone is charged for it, and those costs have been met in two ways, both of which have limits.
| Funding route | Limitation |
|---|---|
| Budgetary incentive schemes | The government has made annual allocations to compensate banks and payment providers for zero-MDR; this converts a private transaction cost into a recurring fiscal commitment |
| Cross-subsidy from other business | Banks absorb costs and recover them elsewhere, which distorts pricing and gives providers little incentive to invest in acceptance infrastructure for low-value merchants |
The result is a system that is free at the point of use, expensive to run, and dependent on either the exchequer or opaque cross-subsidy to survive. A turnover-threshold MDR attempts to hold the adoption gain for small merchants while asking large merchants, for whom a 0.5 per cent fee is a normal cost of doing business, to fund the rails they use most heavily.
The Arguments
| For a threshold-based MDR | Against |
|---|---|
| Restores a revenue base for payment infrastructure without touching small merchants | Any MDR risks slowing acceptance growth, and merchants may pass the cost to consumers through surcharging |
| Reduces the recurring fiscal cost of incentive schemes | The government has repeatedly affirmed zero-MDR as policy; reversal affects predictability for a sector that invested on that basis |
| Aligns India with international practice, where interchange fees fund card networks | A turnover threshold creates a cliff-edge and invites structuring to stay below it |
| Improves incentives to expand acceptance in underserved segments | UPI’s scale advantage derives substantially from being free; pricing it changes the product |
The Institutional Map
| Body | Role |
|---|---|
| Reserve Bank of India | Regulator of payment systems under the Payment and Settlement Systems Act, 2007 |
| National Payments Corporation of India (NPCI) | Operates UPI, RuPay, IMPS and other retail payment systems; a not-for-profit company under Section 8 of the Companies Act |
| Ministry of Finance | Proposes the statutory framework and funds incentive schemes |
| Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) | The RBI board committee overseeing payment system regulation |
UPSC Relevance
GS Paper 3: Indian economy; effects of liberalisation; awareness in the field of IT; inclusive growth and issues arising from it; government budgeting.
Prelims pointers:
- MDR: the fee a merchant pays to accept a digital payment, shared among acquiring bank, issuing bank and network.
- Section 10A, Payment and Settlement Systems Act, 2007, imposed zero MDR on UPI and RuPay debit from January 2020.
- NPCI operates UPI and RuPay; it is a not-for-profit company under Section 8 of the Companies Act.
- Payment systems are regulated by the RBI under the Payment and Settlement Systems Act, 2007.
- Reported proposal: merchants with turnover up to Rs 1.5 crore exempt; large-merchant UPI MDR capped at 0.5 per cent.
Mains question: “A payment system that is free at the point of use is not free; the question is only who pays.” Examine the zero-MDR regime’s role in UPI adoption and assess the case for a turnover-threshold MDR. (250 words)
📌 Facts Corner, Knowledgepedia
The proposal:
- Amend Section 10A of the Payment and Settlement Systems Act, 2007, replacing the statutory zero-MDR bar with an enabling power for the Centre to notify exempt modes.
- Merchants with annual turnover up to Rs 1.5 crore expected to stay exempt; large-merchant UPI MDR proposed at not above 0.5 per cent.
Background: MDR on UPI and RuPay debit was abolished from January 2020 by Section 10A. Since then the running cost has been met through budgetary incentive schemes and bank cross-subsidy.
Institutions: RBI regulates payment systems under the PSS Act, 2007; NPCI operates UPI and RuPay as a Section 8 not-for-profit company.
Sources: Reserve Bank of India, National Payments Corporation of India, Ministry of Finance
Source: Who Pays for Free? The Proposal to Bring Back MDR on Large-Merchant UPI — Ujiyari.com | Free UPSC & State PCS Current Affairs
