Government Weighs MDR, Tiered Incentives to Make UPI Ecosystem More Sustainable

The government is exploring ways to make the Unified Payments Interface (UPI) ecosystem financially sustainable, including the possibility of bringing back the merchant discount rate (MDR) on selected high-value transactions or introducing a tiered incentive system that would gradually reduce dependence on government support.

The Department of Financial Services (DFS), under the Finance Ministry, told the Parliamentary Standing Committee on Finance that it is examining both options in view of the rising cost of operating the country's digital payments infrastructure and the growing burden on the government exchequer.

Under one proposal, MDR could be restored for transactions above a specified value or for certain categories of merchants. The other option involves a tiered incentive mechanism through which government support would be reduced progressively over the coming years.

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The issue has gained importance as UPI transactions have grown rapidly while the system continues to operate without MDR. The government abolished MDR on UPI merchant transactions in January 2020 to encourage digital payments and accelerate the shift away from cash. Before its removal, merchants could be charged an MDR of up to 0.30 per cent on UPI transactions.

In its latest report tabled in Parliament on Wednesday, the Finance Committee highlighted the widening gap between government support and the industry's operating costs. The government has allocated Rs 2,000 crore to incentivise UPI transactions and compensate participants for costs associated with zero-MDR payments, while the industry has estimated its operational cost at around Rs 20,700 crore.

The committee cautioned that inadequate compensation could eventually affect investments in areas that are essential for the reliability and security of India's digital payments network, including cybersecurity, fraud prevention and payment infrastructure.

The scale of the challenge is expected to increase further as UPI adoption continues to expand. The committee noted that the platform could eventually handle as many as 150 billion transactions a month and add around 600 million new users.

At present, government incentives cover only about 11 per cent of the industry's estimated actual costs and around 14 per cent of the potential revenue that could have been generated through MDR, underscoring the financial gap facing the ecosystem.

At the same time, the government has recently created a legal framework that could provide greater flexibility over charges associated with electronic payments. Parliament passed the Taxation and Other Laws (Amendment) Bill, 2026, which amended the Payment and Settlement Systems Act, 2007, allowing the government to specify electronic payment modes that may continue to receive statutory protection from charges.

However, the government has not yet authorised the imposition of MDR on UPI transactions.

Any future change is likely to involve a balancing act. While introducing charges on selected transactions could reduce the government's financial burden and provide payment companies with an additional revenue stream, policymakers would also need to ensure that such a move does not discourage merchants or users from adopting digital payments.

The government's consideration of a targeted MDR or phased incentive model therefore signals a possible shift from the current broad-based support system towards a more selective and financially sustainable framework for India's rapidly expanding digital payments ecosystem.