Merchant Discount Rate (MDR)

Merchant Discount Rate is the commission deducted from a transaction value when a merchant accepts a digital payment, typically expressed as a percentage. It is split among the parties that make the transaction possible: the acquiring bank (which signs up and services the merchant), the issuing bank (which issued the customer's payment instrument) and the payment network operator. MDR is not a tax; it is the commercial revenue model that funds the operating costs of a payment system, including fraud detection, dispute resolution, settlement rails and merchant-acquisition infrastructure. In India, Section 10A of the Payment and Settlement Systems Act, 2007 imposed a statutory zero-MDR requirement on UPI and RuPay debit card transactions from January 2020, removing the merchant's cost of acceptance entirely. This was a deliberate policy choice to drive small-merchant adoption of digital payments, and it succeeded at unprecedented scale, but it left payment infrastructure without its natural revenue base. The resulting costs have since been met through annual government budgetary incentive schemes that compensate banks and payment providers, and through cross-subsidy, banks absorbing costs and recovering them elsewhere. By 2026, this had become a recognised policy problem: a payment system free at the point of use but expensive to run, dependent on the exchequer or opaque cross-subsidy. The Finance Ministry has since proposed amending Section 10A to replace the blanket statutory zero-MDR bar with an enabling power letting the Centre notify which payment modes and merchant categories stay exempt, reportedly retaining exemption for merchants with turnover up to Rs 1.5 crore while capping MDR on large-merchant UPI transactions at not above 0.5 per cent.

• 1 MDR = fee a merchant pays to accept a digital payment, split among acquiring bank, issuing bank and payment network.
• 2 Section 10A, Payment and Settlement Systems Act, 2007 mandated zero MDR on UPI and RuPay debit transactions from January 2020.
• 3 Zero-MDR drove UPI's small-merchant adoption but removed the natural revenue base funding payment infrastructure.
• 4 Costs since met through budgetary incentive schemes (a recurring fiscal commitment) and bank cross-subsidy.
• 5 NPCI (National Payments Corporation of India), a Section 8 not-for-profit company, operates UPI and RuPay.
• 6 The RBI regulates payment systems under the Payment and Settlement Systems Act, 2007, through the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS).
• 7 A 2026 proposal would replace the blanket statutory zero-MDR bar with Centre-notified exemptions, keeping small merchants (turnover up to Rs 1.5 crore) exempt while capping large-merchant UPI MDR at 0.5 per cent.

The 2026 proposal to reintroduce MDR on large-merchant UPI transactions reopened the question of who funds India's payment rails, since zero-MDR had driven adoption but left infrastructure costs dependent on government subsidy.