Merchant Charges on UPI and RuPay May Return: What It Means for Businesses and Consumers

The Indian government is considering reintroducing merchant charges on UPI transactions and RuPay debit cards, a move that could impact millions of businesses and consumers. According to a report by The Economic Times, the government is reviewing a proposal submitted by banks to introduce a tiered pricing system, where larger businesses will pay merchant discount rates (MDR), while smaller businesses may continue to enjoy free transactions.

This change, if implemented, would alter the cost structure for digital payments in India, which have so far been largely free for merchants.

Why Is the Government Considering This Move?

According to senior banking officials, the primary reason for reintroducing MDR is to create a sustainable revenue model for banks and payment service providers that facilitate UPI and RuPay transactions.

• A formal proposal has been submitted to the government by leading banks, suggesting that MDR should be applied to merchants whose annual GST turnover exceeds ₹40 lakh.
• Larger merchants already pay MDR on Visa and Mastercard debit cards, as well as credit cards, so the rationale is that they should also pay a fee for UPI and RuPay transactions.
• The government is considering a tiered pricing system where larger merchants will pay higher MDR charges, while small businesses and micro-enterprises may continue to benefit from zero charges.

A banking official told The Economic Times:
“If large merchants using card machines are already paying MDR on Visa, Mastercard, and all forms of credit cards, why should they not pay for UPI and RuPay transactions?”

UPI and RuPay Usage at an All-Time High

The proposal comes at a time when UPI has become the dominant mode of digital payments in India. According to NPCI (National Payments Corporation of India) data:

• UPI handled 16 billion transactions in February 2025, amounting to nearly ₹22 lakh crore in value.
• RuPay debit cards have also gained traction, particularly due to their widespread acceptance and incentives for domestic transactions.

Despite this massive transaction volume, banks currently earn no revenue from UPI or RuPay transactions because MDR is set at zero. This has led banks to push for MDR reintroduction to offset the operational costs of handling digital transactions.

How MDR Works and Why It Was Removed

Before 2022, merchants were required to pay MDR of less than 1% of the transaction amount to banks and payment processors. However, in the FY22 Union Budget, the government removed MDR on UPI and RuPay transactions to promote digital payments and encourage businesses to shift away from cash-based transactions.

Since the removal of MDR:

• UPI has become India’s most widely used payment method, surpassing debit and credit cards.
• RuPay has expanded its market share, competing with Visa and Mastercard in the domestic payments sector.
• Small businesses have benefited significantly as they could accept digital payments without paying additional charges.

However, banks argue that maintaining UPI infrastructure and processing billions of transactions comes at a cost, and they need a revenue stream to continue supporting digital payments at scale.

Potential Impact on Businesses and Consumers

If the government reinstates MDR on UPI and RuPay transactions, the impact will vary across different types of businesses and consumers.

For Large Businesses

• Large merchants with an annual turnover exceeding ₹40 lakh may have to pay MDR on UPI and RuPay transactions.
• The exact fee structure is yet to be finalized, but it could be similar to the MDR on Visa and Mastercard debit transactions.
• Retail giants, e-commerce companies, and high-volume businesses that rely heavily on digital payments may see increased costs.

For Small Businesses and MSMEs

• The government may keep UPI free for small businesses, kirana stores, and micro-enterprises to avoid discouraging digital adoption.
• If MDR is introduced only for large merchants, small businesses may not be directly affected.

For Consumers

• Consumers may not see direct charges, but if merchants increase product prices to compensate for MDR costs, digital payments could become indirectly more expensive.
• There is a possibility that merchants encourage cash transactions to avoid MDR, which could slow down digital payment adoption.