Proposed UPI Rule Change Could Introduce Merchant Charges While Customer Payments Stay Free

India’s digital payments ecosystem could soon witness one of its biggest policy changes since the launch of the Unified Payments Interface. The Central Government has proposed amendments to the Payment and Settlement Systems Act of 2007 that may allow Merchant Discount Rate charges on UPI transactions once again. The proposal, which has been introduced in Parliament, is aimed at creating a sustainable financial model for the country’s rapidly expanding digital payments network.

Although the proposed amendment has generated widespread discussion, consumers may not have to worry about paying extra while making UPI payments. The proposed legislation primarily focuses on allowing Merchant Discount Rate, commonly known as MDR, to be levied on merchants rather than individual customers. The final rates and implementation details will only become clear if the amendment is approved and the government issues detailed guidelines.

The proposed changes come at a time when UPI has become the dominant digital payment platform in India. Over the past few years, millions of consumers have adopted UPI for everyday transactions ranging from grocery purchases and restaurant bills to utility payments and online shopping. The platform has transformed India’s digital economy by making instant payments simple, secure and accessible across the country.

According to a parliamentary standing committee report released in March 2026, UPI now accounts for approximately 88 percent of all digital payment transactions in India. Every month, banks and payment service providers process more than 23 billion UPI transactions with a combined value of nearly Rs 30 lakh crore. The enormous scale of operations requires continuous investment in technology infrastructure, cybersecurity, servers and payment processing systems.

The government believes that maintaining such a vast payment ecosystem requires a long term funding model. Under the existing framework, UPI transactions and RuPay debit card payments have attracted zero Merchant Discount Rate since 2020. This policy was introduced to encourage digital payments by ensuring that merchants received the complete transaction amount without any deductions.

Merchant Discount Rate is a fee paid by businesses to banks and payment service providers for processing digital transactions. It is regulated by the Reserve Bank of India and is commonly applied to card based transactions. For example, when a customer pays through a credit or debit card, a small percentage of the transaction value is deducted as processing charges before the remaining amount reaches the merchant. This fee is shared among banks and payment service providers involved in completing the transaction.

In contrast, UPI transactions currently operate without any Merchant Discount Rate. Merchants receive the full payment amount, while banks and payment companies do not earn processing fees directly from these transactions. Although this policy has significantly accelerated digital payment adoption, many industry experts believe it has also created financial challenges for companies maintaining the payment infrastructure.

The proposed amendment seeks to remove Section 10A of the existing law, which currently prevents banks and payment service providers from charging Merchant Discount Rate on UPI transactions. If Parliament approves the amendment, the government will have the legal authority to introduce MDR for eligible transactions in the future.

Importantly, the proposed legislation does not mention imposing any transaction charges directly on consumers. This indicates that individuals making payments through UPI are likely to continue enjoying free digital transactions, while any applicable processing costs would be borne by merchants depending on the government’s final policy.

Industry organisations have long argued that the zero MDR policy is financially unsustainable. In March 2025, the Payments Council of India, representing around 180 member organisations, formally requested the government to reconsider the existing policy. The organisation stated that maintaining digital payment infrastructure requires significant investment, while the absence of processing fees limits the financial viability of payment service providers.

According to industry estimates, the annual cost of maintaining and expanding the UPI ecosystem is close to Rs 10000 crore. However, the government’s incentive allocation of approximately Rs 1500 crore covers only a small portion of these expenses. As digital payments continue to grow rapidly, payment companies believe additional funding sources will be essential for ensuring uninterrupted services and future expansion.

The Payments Council of India proposed introducing Merchant Discount Rate on RuPay debit card transactions for all merchants and a modest MDR of around 0.3 percent on UPI transactions involving larger merchants. Smaller businesses could potentially continue receiving exemptions depending on the final policy adopted by the government.

Supporters of the proposal argue that a sustainable revenue model is necessary to strengthen India’s digital payment infrastructure. Continuous investment is required for fraud prevention, cybersecurity upgrades, transaction monitoring, faster payment processing and expanding services into rural areas. Without adequate financial support, maintaining the quality and reliability of the UPI ecosystem could become increasingly difficult as transaction volumes continue to rise.

On the other hand, some industry observers believe policymakers must carefully balance sustainability with affordability. One of UPI’s greatest strengths has been its simplicity and cost effectiveness, helping millions of small merchants adopt digital payments without additional financial burden. Any future implementation of Merchant Discount Rate will likely require careful consideration to ensure that digital payment adoption continues to grow.

The proposed amendment has not yet become law, and several procedural steps remain before any new charges can be implemented. Parliament will need to debate and approve the bill, after which the government would issue detailed regulations specifying the applicable rates, eligible merchants and implementation timeline.

For now, UPI users can continue making digital payments without any changes. The current proposal mainly creates the legal framework for introducing Merchant Discount Rate in the future rather than immediately imposing charges. Customers are therefore unlikely to notice any immediate difference in their everyday transactions.

As India’s digital economy continues its rapid expansion, policymakers face the challenge of balancing consumer convenience, merchant affordability and long term financial sustainability. The proposed amendment represents an important step in that discussion, with its final impact depending on the detailed regulations that may follow if the legislation receives parliamentary approval.