The government is considering restoring the merchant discount rate (MDR) on certain high-value UPI transactions or introducing a tiered incentive structure to gradually reduce government support for the digital payments ecosystem, the Finance Ministry has told a Parliamentary panel.
In a reply to the Parliamentary Standing Committee on Finance, the Department of Financial Services (DFS) has said that it was examining the two options in view of the sustainability of the Unified Payments Interface (UPI) ecosystem and the burden on the government exchequer.
The department is examining the feasibility of restoring MDR for certain high-threshold transactions or merchants and a tiered incentive structure that would phase out government support over the next few years.
On Wednesday, the panel — in its report tabled — noted that the government has allocated Rs 2,000 crore to incentivise UPI transactions and compensate for losses arising from zero-MDR transactions, compared with the industry’s estimated operational cost of Rs 20,700 crore.
The committee said inadequate compensation could affect critical investments in cybersecurity, fraud prevention and payment network infrastructure.
UPI transactions have carried zero MDR since January 2020, when the government abolished the charge to accelerate digital payments and encourage a shift from cash to electronic transactions.
Before that, an MDR of up to 0.30 per cent applied to UPI merchant transactions.
In addition, the committee said UPI is expected to process as many as 150 billion transactions a month and add 600 million new users.
It also noted that the current government incentive covers around 11 per cent of the industry’s actual costs and 14 per cent of potential MDR collections.
However, the Parliament recently passed the Taxation and Other Laws (Amendment) Bill, 2026 which amended the Payment and Settlement Systems Act, 2007, allowing the government to specify electronic payment modes that may continue to receive statutory protection from charges.
The government has not yet permitted the levy of MDR on UPI transactions.
