Government Directs IBA to Prevent Passing of 0.4% UPI MDR Onto Consumers

The Indian government is preparing to direct the Indian Banks' Association (IBA) to establish a formal mechanism preventing merchants from passing the upcoming 0.4% merchant discount rate on Unified Payments Interface transactions directly onto retail consumers. Official sources indicated that the administrative framework will require commercial banks to actively monitor payment processing practices and ensure buyers are shielded from the fee.

Previously, the state funded a subsidy scheme that reimbursed financial institutions substantial amounts annually before scaling back the support to cover only smaller merchant payments. This arrangement originated from statutory provisions enacted at the start of 2020 which mandated fee waivers for specific digital payment modes until the Ministry of Finance introduced changes altering the framework.

The regulatory intervention follows the National Payments Corporation of India announcement introducing a flat fee structure for merchant payments exceeding Rs 2,000, which takes effect on October 15, 2026. Under the updated framework, transactions above Rs 2,000 will face a 0.4% levy capped at Rs 300 for payments of Rs 75,000 or greater, while transactions at fuel stations face a flat Rs 5 levy above the Rs 2,000 threshold.

Official clarifications emphasized that the merchant discount rate functions strictly as a payment processing cost rather than a government tax, cess, or surcharge. Government officials reiterated that not a single rupee from the collection flows into state coffers, with the entirety remaining within the payment ecosystem to sustain operational requirements across participating institutions.

The 0.4% fee distribution allocates 40% of proceeds to the customer issuing bank, 30% to the merchant acquirer or payment gateway, 20% to the third-party application provider, and the remaining 10% to the payer payment system provider bank. Despite this revenue split, government sources acknowledged that the 0.4% rate may remain insufficient to cover the long-term operational and infrastructural needs of the digital payments framework.

National Payments Corporation of India Chief Executive Officer Dilip Asbe addressed stakeholder concerns during the 13th SBI Banking and Economics Conclave 2026, noting that only about 10% of overall transaction value carries the real risk of charges reaching consumers. Asbe explained that approximately 80% of merchant discount rate collections will originate from large corporate entities with annual turnovers exceeding Rs 1,000 crore, firms that already process credit card payments and absorb higher baseline processing costs.

retail groups, including the All India Petroleum Dealers Association, have petitioned the Ministry of Finance and the Ministry of Petroleum and Natural Gas for exemptions. Petroleum dealers warned that fixed per-litre retail margins prevent fuel outlets from absorbing additional processing expenses without straining financial viability.

Finance Ministry officials plan to hold direct discussions with the Indian Banks' Association alongside separate consultations involving merchant representatives and the Confederation of All India Traders. The Indian Banks' Association will also deploy a regional language awareness campaign to educate consumers regarding payment fee structures.

the central government expressed optimism that the GST Council will adopt a reasonable stance regarding the current 18% Goods and Services Tax applied to merchant fees on eligible digital transactions. The Ministry of Finance confirmed that government subsidies supporting the payment architecture will continue as authorities finalize compliance safeguards ahead of the October implementation date.