A proposed merchant discount rate (MDR) on large-value UPI payments is designed to help fund the network’s expanding infrastructure costs while keeping everyday consumer transactions and most small-merchant payments free, according to a report by Economic Times.
Under the framework being discussed, person-to-merchant UPI transactions above Rs 2,000 would attract an MDR of 0.4%. The fee would be capped at Rs 300 for transactions of Rs 75,000 and above. Transactions up to Rs 2,000, which account for more than 95% of UPI merchant-payment volumes, would remain free.
The proposal would also continue to shield small merchants classified under the person-to-person merchant, or P2PM, category. Merchants receiving up to Rs 1 lakh a month through UPI QR codes would pay zero MDR even when individual transactions exceed Rs 2,000. Those crossing the Rs 1 lakh monthly threshold for three consecutive months would move to the commercial person-to-merchant category.
The framework is being positioned as a way to create a more sustainable financial model for UPI without charging consumers for payments. Vishwas Patel, managing director and chief executive of AvenuesAI and chairman of the Payments Council of India, said the proposed rate would support the system’s scale while keeping UPI free for consumers.
Industry estimates cited in the report put the annual cost of operating UPI infrastructure at around Rs 20,000 crore. This includes expenditure on servers, cybersecurity, fraud prevention, banking technology support and other systems needed to process the country’s rapidly expanding digital payments activity. The proposed levy is therefore expected to support maintenance and upgrades rather than create a large profit pool for banks and payment companies.
The proposed distribution of the MDR would give 40% to the issuing bank, 30% to the UPI application and 30% to the acquiring bank, people familiar with discussions at the NPCI steering committee said. Payment applications would consequently receive only part of the headline fee while continuing to bear costs related to technology, fraud controls, merchant servicing and customer support.
The structure also includes a proposed Rs 700 crore fund for expanding merchant onboarding and UPI acceptance infrastructure in Tier 3 to Tier 6 centres, the Northeast, Jammu and Kashmir, and Ladakh. The fund would also support eligible government schemes and incentivise transactions at small merchants.
The report said the detailed framework for the fund is expected to be finalised with the Reserve Bank of India over the next three months. Government incentives that helped support UPI were described as bridge funding rather than a permanent financing mechanism for a payment system operating at its current scale.
The proposal would make larger commercial merchants contribute to the cost of the payment network while protecting consumers and smaller businesses from direct charges. Its implementation will depend on the final framework agreed with the RBI and the NPCI-led payment ecosystem.
