Finance Minister Nirmala Sitharaman has dismissed allegations that the government introduced a 0.4 per cent Merchant Discount Rate (MDR) on specific Unified Payments Interface (UPI) transactions under external pressure. Describing the claims as absolutely baseless, the Minister stated that the decision was a professional framework developed by the payment ecosystem, including the National Payments Corporation of India (NPCI), payment banks, and merchant banks, rather than a government mandate.
Revenue Distribution and Ecosystem Impact
The new MDR framework, scheduled to take effect on October 15, applies to person-to-merchant UPI transactions exceeding ₹2,000. Addressing concerns regarding the nature of the charge, Sitharaman clarified that the levy is neither a tax, cess, nor surcharge, and that no portion of the collected funds will accrue to the Consolidated Fund of India. Instead, the revenue will be distributed among the participants of the digital payments infrastructure to ensure its long-term sustainability.
Under the revenue-sharing model, 40 per cent of the collected MDR will be allocated to the customer's bank, 30 per cent to payment gateways, 20 per cent to the UPI application, and the remaining 10 per cent to the sponsoring bank of the UPI application. The government has emphasized that person-to-person transfers remain free, and merchant payments up to ₹2,000 are excluded from the new framework.
Sector-Specific Rates and Subsidy Coordination
While the standard MDR is set at 0.4 per cent, specific sectors will operate under different terms. Essential services, including railways, telecom, fuel, and insurance, will attract a flat ₹5 fee for transactions above the ₹2,000 threshold. Capital market transactions, such as mutual funds and stockbroking payments, will be subject to a lower MDR of 0.02 per cent, capped at ₹300. Additionally, the MDR for general transactions is capped at ₹300 for payments of ₹75,000 or more.
To support small businesses, five per cent of total MDR collections will be directed into a dedicated fund aimed at expanding UPI adoption. Furthermore, the Ministry of Finance is coordinating with the Indian Banks' Association to determine the future of existing government subsidies for low-value UPI transactions and to ensure that merchants do not pass the MDR costs on to consumers.
Legislative changes in January 2020 eliminated the merchant discount rate for RuPay debit cards and BHIM-UPI payments to encourage digital adoption. Additionally, an incentive scheme covering small merchant transactions up to 2,000 was established with an estimated outlay of 1,500 crore for the 2024-2025 period.
