Govt weighing two models to offset UPI costs: FinMin tells Parl panel | Economy & Policy News

The Department of Financial Services is weighing two options to ease the financial costs involving Unified Payments Interface (UPI): Restoring the merchant discount rate (MDR) for certain high-value transactions or merchants, or introducing a tiered incentive structure to phase out government support over the next few years, the Finance Ministry told the Parliamentary Standing Committee on Finance. 

“Given the sustainability of the UPI ecosystem and the burden on the Government exchequer, the Department is currently exploring two options: (i) Examining the feasibility of restoring MDR for certain high-threshold transactions/merchants; and (ii) A tiered incentive structure to phase out the government support in the next few years,” the department said in a reply to the panel dated July 17. 

The parliamentary panel, in a report tabled on Wednesday, noted that the budgetary allocation to incentivise UPI transactions and offset zero-MDR losses was ₹2,000 crore, compared with the industry’s estimated operational cost of ₹20,700 crore. 

“While statutory enablement now exists to permit calibrated MDR on high-value transactions, any delay in notifying and operationalising this framework leaves payment service providers heavily dependent on inadequate subsidies, thereby threatening critical investments in cybersecurity, fraud prevention, and network infrastructure,” the committee, chaired by Lok Sabha member Bhartruhari Mahtab, said in its report. 

An MDR of up to 0.30 per cent of transaction value applied to UPI merchant transactions in India until 2019. The Centre introduced zero MDR on all UPI transactions in January 2020 to accelerate digital-payment adoption and spur a shift from cash to digital. 

The committee said UPI is expected to process as many as 150 billion transactions a month and add 600 million new users. The current government incentive, however, covers about 11 per cent of the industry’s actual costs and 14 per cent of potential MDR collections, according to the report. 

Parliament passed the Taxation and Other Laws (Amendment) Bill, 2026, earlier this week, amending the Payment and Settlement Systems Act, 2007. The amendment allows the government to specify by notification the electronic payment modes that may continue to receive statutory protection from charges. The government has yet to permit the levy of MDR. 

The UPI and Services Steering Committee, headed by the National Payments Corporation of India (NPCI), will decide the structure of MDR and the threshold above which UPI transactions would attract the fee. The government has so far maintained that any MDR would apply only to a limited set of merchant transactions above a specified threshold and at a nominal rate, well below those charged on debit or credit cards. 

“The committee would like to emphasise that establishing a viable revenue mechanism is critical to ensuring the UPI ecosystem achieves financial sustainability without perpetually straining the government exchequer,” the report said. 

Union Finance and Corporate Affairs Minister Nirmala Sitharaman told the Rajya Sabha on Monday that any future fee on digital payments would apply only to a limited category of merchant transactions above a high threshold. Consumers, she said, would continue to make instant digital payments through UPI without a transaction charge.