India is examining a proposal to restore merchant discount rate charges on Unified Payments Interface transactions for large merchants, a move that would mark a significant change in the economics of the country’s dominant retail payments rail. The proposal under consideration is not expected to cover small merchants or lower-value transactions, preserving the zero-cost model for the segments that have driven UPI’s mass adoption while creating a monetisation route for banks and payment service providers handling large commercial volumes. The proposal is awaiting final government approval and has emerged after repeated industry representations on the sustainability of the current model.
The possible change comes as UPI continues to operate at enormous scale. NPCI data for June 2026 shows 22.72 billion UPI transactions worth Rs 28.92 lakh crore, keeping the platform above the 22-billion-monthly-transaction mark even after a sequential easing from May. The zero-MDR framework has helped UPI become embedded across offline retail, ecommerce, financial services, subscriptions, utility payments and peer-to-peer transfers. Under the current government-backed incentive structure, small merchants receive support for transactions up to Rs 2,000, while large merchants remain on zero MDR without incentives.
A targeted reintroduction for large businesses would alter cost allocation across the payments chain. Banks, payment apps, acquirers, payment aggregators and technology service providers have long argued that processing, fraud control, dispute management, uptime, reconciliation and merchant support require recurring investment. The zero-fee structure has compressed revenue opportunities even as transaction volumes have grown. For large merchants, MDR would become a direct payments acceptance cost, with implications for ecommerce platforms, organised retail chains, travel companies, food delivery, mobility, digital services and subscription businesses that handle high-value or high-frequency UPI flows.
The likely exclusion of small merchants and smaller transactions is central to the proposal’s policy design. It would allow the government to preserve UPI’s low-friction inclusion narrative while creating a differentiated commercial structure for enterprise-scale usage. The distinction also reduces the risk of broad consumer backlash because person-to-person transfers and small merchant payments are unlikely to be immediately affected if the proposal proceeds in its current form.
The issue is also closely tied to competition within digital payments. UPI’s success has made India one of the world’s largest real-time payments markets, but it has also concentrated transaction economics in a system where payment apps compete aggressively without direct merchant revenue on standard UPI acceptance. A carefully calibrated MDR framework for large merchants could shift incentives toward service quality, reliability, fraud mitigation and value-added merchant tools. The final structure, including threshold definitions, applicable rates, exemptions and implementation timelines, will determine whether the policy functions as a narrow sustainability mechanism or a broader reset of India’s digital payments business model.
