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The government is evaluating a proposal to introduce a merchant discount rate (MDR) on UPI payments made by large merchants, in a move aimed at improving the financial sustainability of India’s digital payments ecosystem.

According to a report by Moneycontrol, the proposed MDR could be set below 0.5% and may apply only to transactions above Rs 2,000. A final decision on the proposal is expected within two weeks.

MDR is a fee charged to merchants by banks and payment service providers for processing digital transactions. Government officials clarified that the proposed move will not result in any charges for consumers using UPI.

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“The MDR is not about charging consumers for UPI transactions. The discussion is around merchant-side economics and sustainability of the payments ecosystem,” the report cited a government source saying.

Officials said UPI has witnessed massive growth in recent years, but maintaining the underlying payment infrastructure has also increased costs for banks and other participants.

The government believes that the current model needs to become commercially sustainable over the long term.

At present, the government provides incentives to banks and payment operators for low-value UPI transactions of up to Rs 2,000.

The incentive programme, called the “Incentive Scheme for Promotion of RuPay Debit Cards and Low-Value BHIM-UPI Transactions”, was introduced in FY22 to encourage digital payments, improve financial inclusion and expand adoption across the country.

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A report by the Standing Committee on Finance in March 2026 highlighted concerns over the sustainability of the UPI ecosystem due to the absence of MDR.

The committee noted that while zero MDR helped make digital payments affordable and accessible, it also created financial challenges for ecosystem participants.

The panel projected that UPI could grow significantly in the coming years, potentially adding 600 million new users and handling 100-150 billion transactions every month over the next five to seven years.

However, the report warned that achieving such expansion could be difficult due to slowing growth momentum and a funding gap affecting investments in infrastructure, cybersecurity and merchant onboarding.

The proposed MDR framework is being considered as a possible solution to address these challenges while ensuring that consumers continue to access UPI services without direct charges.