The government on Thursday moved to calm a growing backlash over the introduction of a merchant discount rate on select UPI transactions, saying the new charge will not be passed on to consumers and is not a tax, cess or surcharge. The clarification comes after criticism from Opposition parties, including the Congress, which argued that the measure amounted to a hidden levy on everyday digital payments.
According to government sources, the 0.4% merchant fee on UPI payments above Rs 2,000 will be paid by merchants and absorbed within the payments ecosystem rather than transferred to customers at the point of sale. "MDR levy of 0.4% on UPI transactions above Rs 2,000 will not be passed on to the consumers. Banks, as well as the Indian Banks' Association, will address misconceptions related to MDR charges and their impact on users," the sources said.
The clarification is significant because UPI has become the backbone of India's retail digital payments revolution, with consumers accustomed to making instant transfers without visible charges. Any suggestion that UPI could become more expensive has triggered concern among users, small businesses and fintech firms alike. Government sources sought to draw a sharp distinction between the new fee and a consumer-facing charge, stressing that "not a single penny" from the proposed MDR will go to the government's coffers.
Instead, the collected amount will be distributed across the ecosystem that enables UPI transactions. Of the total MDR collected, 40% will go to customers' banks, 30% to the payment gateway, 20% to the UPI app and the remaining 10% to the sponsoring bank of the UPI app, the sources said. The structure, they added, is intended to support the infrastructure that processes and secures digital transactions rather than create a new revenue stream for the state.
The new framework, effective October 15, will apply only to person-to-merchant UPI payments above Rs 2,000. Person-to-person transfers will remain free regardless of amount, preserving the zero-cost feature that has helped UPI scale rapidly across India. The government also said the vast majority of everyday merchant payments will remain unaffected, and that small merchants collecting up to Rs 1 lakh a month via UPI QR codes will continue to be fully exempt from any new charge. Officials said this exemption shields about 96% of all merchant transactions.
Certain sectors will see specific treatment under the new arrangement. 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, including mutual funds and stockbroking, will face a lower 0.02% rate, capped at Rs 300. For larger merchant transactions, the 0.4% MDR will be capped at Rs 300 for payments of Rs 75,000 or more.
The National Payments Corporation of India, which operates the UPI platform, issued a circular on September 15 introducing MDR on certain UPI transactions. The move, officials said, is meant to create a sustainable revenue framework for the digital payments ecosystem. That argument is central to the government's defence: as UPI volumes continue to rise, the system's long-term viability depends on ensuring banks, gateways, apps and sponsoring institutions can recover costs and continue investing in the network.
To reinforce that message, the Indian Banks' Association is expected to launch an awareness campaign to counter what officials described as misconceptions and rumours around the levy. Government sources also expressed hope that the GST Council would review the 18% GST currently applied to merchant fees on UPI transactions above Rs 2,000, citing the precedent of relief granted in the case of insurance premiums.
A dedicated fund to promote UPI usage among small merchants will also be created, financed by 5% of total MDR collections. Officials said the fund will help expand UPI acceptance, encourage sustained usage and accelerate the inclusion of small businesses in India's digital payments economy.
The policy shift reflects a delicate balancing act: preserving the convenience and popularity of UPI for consumers while addressing the financial strain on the institutions that keep the system running. Whether the clarification is enough to prevent confusion among users and merchants will depend on how quickly banks, payment companies and the government can explain the new rules in a market where even small changes to digital payments can have outsized political and commercial consequences.