For Prelims: Merchant Discount Rate (MDR), Unified Payments Interface (UPI), Payment and Settlement Systems Act, 2007
For Mains: Digital payment ecosystem sustainability, cost-recovery model vs. public subsidy, regulatory framework under RBI and Payment and Settlement Systems Act, 2007
New update
New facts from Hindustan, 6 November 2026
- Central government told SC merchants were never promised free UPI forever
- Centre filed affidavit in SC on 4 November 2026 in response to PIL by advocate Anjan Dutta
- Incentive paid to banks from FY 2021-22 to 2024-25: ₹8,730 crore
- Estimated annual operational cost of UPI: ~₹20,700 crore
- Governing legal provision: Payment and Settlement Systems Act, 2007, Section 10A
- Small merchant exemption: UPI QR receipts up to ₹1 lakh per month
- Promotion of domestic RuPay card as part of the framework
New facts from Hindustan, 9 November 2026
- MDR capped at ₹300 for transactions of ₹75,000 or more
- Implementation date postponed to Diwali, yet to be announced
5 facts for one-day exams
SSC, railway, police and teaching exams ask direct questions like these.
- NPCI introduced MDR of up to 0.4% on P2M UPI transactions above ₹2,000.
- P2P UPI transactions and P2M transactions up to ₹2,000 remain free.
- Only about 4% of merchant transactions are affected by the new MDR.
- UPI processed 241.62 billion transactions worth ₹314 lakh crore in FY 2025-26.
- MDR is a cost-recovery charge, not a tax, under the Payment and Settlement Systems Act, 2007.
Why in the news?
The government has introduced a Merchant Discount Rate (MDR) of up to 0.4% on UPI Person-to-Merchant (P2M) transactions above ₹2,000, ending the zero-MDR regime. The NPCI defended the move in the Supreme Court, arguing that zero MDR is unsustainable given the massive growth in UPI transactions (241.62 billion transactions worth ₹314 lakh crore in FY 2025-26) and that the charge is needed to cover the costs of security, infrastructure, and operations. P2P transactions and P2M transactions up to ₹2,000 remain free.
Summary
- UPI processed 241.62 billion transactions worth ₹314 lakh crore in FY 2025-26; 24.51 billion transactions in August 2026 alone.
- MDR of up to 0.4% introduced on Person-to-Merchant (P2M) UPI transactions above ₹2,000; 96% of all P2M transactions remain unaffected.
- NPCI argued MDR is a cost-recovery charge, not a tax, and is permissible under the Payment and Settlement Systems Act, 2007.
Background
UPI has grown exponentially in India, processing over 241 billion transactions in FY 2025-26. Until now, the government had maintained a zero-MDR regime, with costs partially offset by budgetary incentives (₹2,000 crore in 2026-27, covering only 11% of industry costs). The Standing Committee on Finance (18th Lok Sabha) recommended a self-reliant, tiered revenue model.
Key Analysis and Impact
The new MDR framework targets only high-value merchant transactions (above ₹2,000), affecting just 4% of all P2M transactions. This protects small merchants and everyday users. NPCI argues that MDR is essential for funding security, IT infrastructure, and operations. The move shifts the cost burden from the government to the ecosystem participants, ensuring long-term sustainability.
Legal and Regulatory Framework
NPCI cited Section 10A of the Payment and Settlement Systems Act, 2007, which prohibits charges on UPI transactions below ₹2,000. The MDR is a charge set by the system provider (NPCI) under RBI's regulatory framework, not a statutory levy. The Supreme Court challenge questioned the government's authority to introduce MDR via notification rather than legislation.
Way Forward
The Supreme Court's decision on the challenge will set a precedent for digital payment regulation in India. The MDR framework is expected to make the UPI ecosystem financially self-sustaining. Future policy may see tiered MDR rates or adjustments based on transaction volumes and merchant categories.
Background GK
Textbook concepts you need to understand this news
- Merchant Discount Rate (MDR)
- A fee charged to a merchant for processing digital payments, typically a percentage of the transaction value, paid to the payment system participants (banks, payment aggregators).
- Unified Payments Interface (UPI)
- A real-time payment system developed by the NPCI that facilitates inter-bank transactions through mobile phones.
- Payment and Settlement Systems Act, 2007
- An Act to provide for the regulation and supervision of payment and settlement systems in India, with the RBI as the designated authority.
Facts to remember
Tap a card to see the answer. Try to recall it first.
How exams will ask this
- Data: MDR up to 0.4% on P2M UPI transactions above ₹2,000; 96% of P2M transactions unaffected
- Nodal Body: National Payments Corporation of India (NPCI)
- Legal Point: Section 10A, Payment and Settlement Systems Act, 2007
Common mistake:
Examiners may ask that MDR was introduced on ALL UPI transactions, or confuse the threshold (₹2,000) with the rate (0.4%). Another trap: stating that P2P transactions also attract MDR (they do not).
Write these in mains answers
- Digital payment ecosystem sustainability, cost-recovery model vs. public subsidy, regulatory framework under RBI and Payment and Settlement Systems Act, 2007
Stuck? Get it in one tap
When you pay a shop using UPI, the shopkeeper used to pay nothing extra. Now, for payments above ₹2,000, the shopkeeper will pay a small fee (up to 0.4%), similar to what happens with credit card payments. Sending money to a friend or paying a small amount stays free. This fee helps pay for the UPI system's security and maintenance.
- Economy: Digital payments and financial inclusion
- Governance: Regulatory bodies and their functions
Related concepts: Merchant Discount Rate (MDR), Unified Payments Interface (UPI), Payment and Settlement Systems Act, 2007
Practice questions
Pick an answer, then read the explanation.
- Q1Easy
Which organization operates the Unified Payments Interface (UPI) in India?
Explanation: UPI is operated by the National Payments Corporation of India (NPCI), an umbrella organisation for operating retail payment and settlement systems. The RBI is the regulator, not the operator. The Ministry of Finance and SEBI are not directly involved in UPI operations.
- Q2Hard
Consider the following statements regarding the new Merchant Discount Rate (MDR) framework for UPI:
- 1.MDR of up to 0.4% will apply to all Person-to-Merchant (P2M) UPI transactions.
- 2.Person-to-Person (P2P) UPI transactions will remain completely free of any charges.
- 3.MDR is a tax imposed by the government under a legislative enactment.
Which of the statements given above is/are correct?
Explanation: Statement 1 is incorrect because MDR applies only to P2M transactions above ₹2,000, not all P2M transactions. Statement 2 is correct because P2P UPI transactions remain free of charges. Statement 3 is incorrect because NPCI argued MDR is a cost-recovery charge, not a tax or statutory levy.
- Q3Medium
What was the total value of UPI transactions processed in the month of August 2026?
Explanation: UPI processed transactions worth approximately ₹29.82 lakh crore in August 2026. The figures for FY 2025-26 are about 241.62 billion transactions (volume) valued at approximately ₹314 lakh crore (value).
- Q4Medium
What is the primary objective of introducing the Merchant Discount Rate (MDR) on certain UPI transactions?
Explanation: NPCI argued that the zero-MDR regime was unsustainable and that the MDR is a charge to recover the costs of IT infrastructure, security, and operations. It is not a tax (A) nor intended to reduce transactions (B) or discourage digital payments (D).
Frequently asked questions
1. What is the new Merchant Discount Rate (MDR) on UPI transactions?
An MDR of up to 0.4% has been introduced on Person-to-Merchant (P2M) UPI transactions above ₹2,000. P2P transactions and P2M transactions up to ₹2,000 remain free.
2. Why did NPCI introduce MDR on UPI transactions?
NPCI argued that the zero-MDR regime was unsustainable due to the massive growth in UPI transactions, and the MDR is needed to recover costs of IT infrastructure, security, and operations.
3. What percentage of UPI merchant transactions are affected by the new MDR?
Only about 4% of all Person-to-Merchant (P2M) transactions are affected, as the MDR applies only to transactions above ₹2,000.
4. Is MDR a tax imposed by the government?
No, NPCI has clarified that MDR is a cost-recovery charge collected by system participants, not a tax, cess, or statutory levy.
All sources
Original5 November 2026 · Read story- Merged5 November 2026 · Read story
- Update6 November 2026 · Read story
- Update9 November 2026 · Read story
