The Finance Ministry is preparing a monitoring mechanism to ensure that the 0.4 per cent Merchant Discount Rate (MDR) on UPI transactions above Rs 2,000 is not passed on to customers.
The move comes amid concerns that payment aggregators or other stakeholders could transfer the MDR burden to end users.
Steps to ensure burden is not passed on to consumers
As per the sources, the ministry has already initiated discussions with payment aggregators and other stakeholders in the Unified Payments Interface (UPI) ecosystem to sensitise them about the MDR and ensure that the burden is not passed on to consumers.
On concerns that the levy could lead to an increase in prices of goods and services, the sources said the measure is unlikely to have an inflationary impact.
The sources also said the Goods and Services Tax (GST) applicable on MDR will be largely offset through input tax credit and, therefore, its impact on the overall cost is expected to be limited.
Various transactions have been put under specialised categories, the sources said, adding that the ministry does not anticipate any significant impact of GST on MDR.
However, if any issues relating to GST on MDR remain unresolved, they could be taken up for consideration by the GST Council at its meeting, the sources added.
Ministry allays fears of increase in cash transactions
The ministry does not expect an increase in cash transactions due to the levy of 0.4 per cent MDR for UPI transactions.
Sources said it is anticipated that the imposition of MDR would not lead to a reduction in UPI transactions as only 4 per cent of total volume is getting impacted due to the decision.
Asked about the concerns leading to an increase in cash transactions post October 15, sources said it is unlikely to happen as transactions through RuPay debit cards are completely free regardless of amount.
MDR on UPI
The introduction of a 0.4 per cent MDR on certain UPI transactions above Rs 2,000 is aimed at creating a sustainable revenue framework for the digital payments ecosystem.
The MDR is a fee paid by merchants to payment service providers for processing digital transactions.
From October 15, a 0.4 per cent MDR will apply to person-to-merchant UPI payments above Rs 2,000. The charge will be paid by merchants, not consumers, and will be capped at Rs 300 for transactions of Rs 75,000 or more. Payments between individuals, as well as the vast majority of everyday merchant payments, will remain free.
Essential services, such as railways, telecom, fuel and insurance, will attract a flat Rs 5 fee per transaction above Rs 2,000. Capital markets transactions (mutual funds, stockbroking) get a lower 0.02 per cent rate, also capped at Rs 300.
Small merchants collecting up to Rs 1 lakh a month via UPI QR codes remain fully exempt from any new charge – a carve-out, officials say, shields about 96 per cent of all merchant transactions.
On the rationale of 0.4 per cent MDR, sources said, most countries have that kind of charge and studies have also indicated that this is a sustainable level.
The NPCI, which operates the UPI platform, on September 15 issued a circular providing for MDR on certain UPI transactions, with the move aimed at creating a sustainable revenue framework for the digital payments ecosystem.
Did US pressure influence the decision?
The Finance Ministry dismissed allegations that US pressure influenced the decision to levy a 0.4 per cent Merchant Discount Rate (MDR) on select UPI payments, saying the latest NPCI guidelines do not offer any advantage to international credit cards over RuPay on the UPI platform.
The Department of Financial Services (DFS) issued the clarification in response to observations in the US Trade Representative’s (USTR) 2026 report on the inability of US electronic payment service providers to participate in the UPI ecosystem, including credit transactions on UPI, on a level playing field with RuPay.
“The NPCI circular of September 15, 2026, does not allow credit transactions on UPI by any other credit card other than the RuPay credit card. There is a clear policy of only allowing the RuPay credit card on UPI to enable the RuPay credit card to become the preferred choice of credit card amongst users in India,” the DFS said in a post on X.
“The allegation that MDR has been introduced under any external influence is patently false and misleading,” it added.
The rejection comes amid allegations by the Congress and other Opposition parties that the government had succumbed to US pressure in deciding to impose a 0.4 per cent MDR on UPI transactions above Rs 2,000.
With inputs from PTI
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