Govt Opens Door to MDR On UPI, To Amend Digital Payment Rules

In what could likely pave the way for the reintroduction of the merchant discount rate (MDR) on UPI payments, the Union government has proposed amendments to the Payment and Settlement Systems Act (PSSA), 2007.

Clubbed under the Taxation And Other Laws (Amendment) Bill, 2026, the proposed rules aim to amend the Section 10A of the 2007 Act. The section specifically bars banks and system providers from “directly or indirectly” imposing a charge on UPI payments. 

However, the new amendments replace the blanket prohibition and exempt only certain online payment modes, notified by the government, from the MDR.

“In the Payment and Settlement Systems Act, 2007, in section 10A, for the words, figures and letters “the electronic modes of payment prescribed under section 269SU of the Income-tax Act, 1961”, the words “one or more electronic modes of payment as the Central Government may, by notification, specify” shall be substituted with effect from the date of publication of this Act in the official gazette,” read the new Bill accessed by Inc42.

The proposed rules are expected to be tabled in the Parliament tomorrow, as per reports. 

The changes would enable the Centre to directly notify which means of electronic payments are to remain exempt from MDR charges. It, however, doesn’t specify whether any particular payment methods are to be charged or how. 

Industry Cheers On 

Even as ambiguity continued over which online payment modes would attract MDR, fintech major Pine Labs’ cofounder and CEO Amrish Rau welcomed the proposed rules. 

In a post on X, Rau called the amendments a “step” towards implementing MDR in some shape or form. He claimed that the zero-MDR regime had slowed the growth pace of the ecosystem in the past six years as investments towards building the digital payments infrastructure had ballooned almost 300% in the past 12-24 months. 

Citing the examples of Brazil’s PIX and China’s real-time payment systems charging MDR of 30-40bps, he said that both nations have achieved over 90% penetration in digital payments penetration across users and merchants. In contrast, he claimed that India currently has brought around 35-40% users into the realm of digital payments.

“For us to get to 90% penetration, and to take UPI global, startups, fintechs, and banks will need to fund this expansion through continued investments in IT, innovation, and cyber security. These costs have increased by almost 300% over the last 12–24 months. While there should be some recovery of these investments, P2P transactions—and charges to consumers—should continue to remain zero,” Rau added. 

The Bill also removes reference to Section 269SU of the Income Tax Act, which could enable the Centre to directly notify which means of electronic payments are to remain exempt from the MDR charges. 

An industry insider also told Inc42 that the Bill’s text, by removing the reference to I-T Act, also translates to moving the pricing decision (of the MDR) directly under RBI control. 

The move comes amid the resurgence of a debate around whether banks, aggregators, and other financial institutions should be allowed to monetise UPI. As it stands, UPI transactions have carried zero MDR for nearly six years, driving widespread adoption of digital payments. 

However, players in the payments ecosystem have long sought to change this in order to cover the operational costs of running the infrastructure that powers digital payments. 

While the Centre had allocated ₹2,000 Cr to incentivise digital payments under the Union Budget for FY27, industry leaders had been pushing for much higher subsidies. With the new norms, the government could be looking to do just that. But how?

Earlier last week, Inc42 reported that the government was weighing a targeted reintroduction of MDR. Under the proposal, businesses with an annual turnover of ₹1 Cr to ₹1.5 Cr or more would attract an MDR of 0.05% to 0.07% on UPI transactions above ₹2,000.

While it would be interesting to see if the Centre moves ahead with the MDR regime, UPI continues to see rapid growth across the board. The payments infrastructure processed 2,366 Cr transactions in July, up 4% from 2,272 Cr in the previous month. The total transaction value increased 3% to ₹29.88 Lakh Cr during the month under review from ₹28.92 Lakh Cr in June.

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