The introduction of the Merchant Discount Rate (MDR) will help more domestic payments companies to operate under UPI, contrary to the allegation that the charge has been introduced under external pressure, the government said on Thursday.

The public sector National Payments Council of India (NPCI) on Wednesday announced the MDR structure on UPI payments prompting criticism from the Opposition and allegations that U.S. pressure had pushed the Indian government to introduce this charge.

“Contrary to misleading claims made that MDR has been introduced under external pressure, introduction of MDR on select high-value transactions will enable more domestic companies to operate under UPI,” the Department of Financial Services (DFS) said on X. “Thus, the action of introduction of MDR is a step in protecting India’s sovereignty in the electronic payment ecosystem.”

The DFS further said that the allegations of U.S. pressure refer to a report by the U.S. Trade Representative in which it cites the inability of American electronic payment services suppliers to participate in the UPI ecosystem, including credit transactions on UPI, on a level playing field with RuPay. 

The DFS said that the actions by the NPCI do not rectify these American concerns. 

“The NPCI circular of 15.9.2026 does not allow credit transactions of UPI by any other credit card other than RuPay credit card,” the DFS clarified. ‘There is a clear policy of only allowing RuPay credit card on UPI to enable RuPay credit card to become the preferred choice of credit card amongst users in India.”

The USTR report also raised the issue of an NPCI rule mandating a maximum market share of 30% for third-party apps as a potential hindrance. Here, too, the DFS said that while the rule was put in place, enforcement was not possible due to market conditions. 

“Although NPCI had mandated market share limitation of 30% for third-party application providers in November 2020, however, this mandate could not be implemented because companies other than the market leaders could not compete in absence of a self-sustaining revenue model,” the DFS said.  

A previous analysis by The Hindu shows that India’s UPI market is dominated by American companies, with Walmart-owned PhonePe holding a market share of about 46% and Google Pay with 32% in the total volume of UPI transactions conducted in the country. 

“Introduction of MDR on select high-value transactions will provide a self-sustaining revenue model to smaller companies to compete for higher share in the UPI ecosystem,” the DFS said. “Thus, introduction of MDR has been done with the intention of allowing more domestic companies to expand their operations.”

The National Payments Corporation of India (NCPI) has introduced a Merchant Discount Rate (MDR) of 0.4% that merchants will have to pay to banks and payment processors on UPI transactions over ₹2,000. The NCPI circular, issued on September 15, 2026, stipulated that the new charge would be applicable only for person-to-merchant UPI transactions and will have no impact on small-value UPI transactions up to ₹2,000.

The circular also stated that small merchants receiving up to ₹1 lakh per month via UPI QR codes, under the Person-to-Person Merchant (P2PM) classification, will not have to pay MDR on any UPI transactions that they receive. However, transactions pertaining to certain essential sectors, such as railways, telecom and fuel, will attract a flat MDR of ₹5 per transaction for payments above ₹2,000 rather than a percentage. For transactions of ₹75,000 and above, MDR will be capped at ₹300 per transaction.

How is MDR calculated for UPI transactions

For UPI transactions of ₹2,000 and below, there will not be any MDR charges. For payment of ₹3,000, the MDR of 0.4% will be applicable that will lead to merchants paying ₹12, while ₹50,000 transaction will lead to a fee of ₹200. For all transactions of 75,000 and above, the MDR charge will be capped at ₹300.

According to the Ministry of Finance, only 4% of merchant transactions will attract the charge for payments above ₹2,000.

Is MDR applicable for UPI transactions between friends and family?

No, the MDR fee will not be applicable for person-to-person UPI transactions that will remain free of cost, irrespective of the transaction value. Zero charges will apply when you transfer money to family members or friends.

Will the consumers be charged?

No, consumers will not be charged for UPI services, as per the circular. Ordinary consumers can continue to make transactions free-of-cost using UPI as they have been doing till now.

When will the new MDR charges come into effect?

The new MDR structure will be effective from October 15, 2026.

The current UPI framework appears financially unsustainable and risks undermining critical investments in cybersecurity, fraud prevention and network infrastructure, due to inadequate subsidies, the Standing Committee on Finance told Parliament on Wednesday. In response, the government said it was currently looking at two ways to move forward with making the UPI platform self-sustaining.

The first option being explored is a charge on certain high value transactions and high turnover merchants, the Ministry of Finance informed the Committee. 

The other option, it said, was a “tiered incentive structure” so that the government can phase out its current scheme under which it compensates payment ecosystem players for a portion of the cost of processing low-value UPI transactions conducted at small merchants. It did not, however, elaborate on this structure.   

These submissions were revealed in the Committee’s report placed before the Lok Sabha on Wednesday. They were made in reply to the Committee’s recommendations to the government to find some way to make UPI financially sustainable without inflating the government’s budget.

Government’s two options

“Given the sustainability of the UPI ecosystem and the burden on the Government exchequer, the Department is currently exploring two options: (i) Examining the feasibility of restoring MDR for certain high threshold transactions/ merchants; and (ii) a tiered incentive structure to phase-out the Government support in the next few years,” the Department of Financial Services informed the Committee.

The Merchant Discount Rate (MDR) is a charge the payment ecosystem such as banks, payments processors, and gateways levy on merchants. Currently, while these charges are levied on most debit card and all credit card transactions, UPI and RuPay debit card transactions were exempted from this charge in 2020.  

Inadequate subsidies

The Committee found that the government’s current scheme to partially reimburse payment processors for the cost they incur for processing UPI transactions was significantly short of the actual cost. 

“The Committee remain deeply concerned by the staggering mismatch between the ₹2,000 crore allocation and the industry’s estimated operational cost of ₹20,700 crore,” the report said. 

It said that, while UPI is expected to process up to 150 billion transactions per month and add 600 million new users, the current government incentive covers “merely 11% of the industry’s actual costs and 14% of potential MDR collections” and “needlessly inflates” the overall Demand for Grants of the Department.  

Enabling law in place

It further took note of the fact that legislative amendments had now been made to empower the government to reimpose an MDR charge on UPI transactions. 

This was done through the Taxation and Other Laws (Amendment) Bill, 2026, passed in Lok Sabha on August 6, 2026, which said that the government can in the future notify the kinds of transactions that can attract such a charge. 

“In the view of the Committee, while statutory enablement now exists to permit calibrated MDR on high-value transactions, any delay in notifying and operationalising this framework leaves payment service providers heavily dependent on inadequate subsidies, thereby threatening critical investments in cybersecurity, fraud prevention, and network infrastructure,” the report said.