UPI MDR debate: Why ₹2,000 is in focus and what it means for users | Economy & Policy News

But ₹2,000 is not an announced MDR threshold. Its significance comes from an older government incentive framework, while reports have cited the same level as one option being considered for a future merchant-fee regime.

Where did the ₹2,000 cut-off come from?

The ₹2,000 figure comes from the government’s UPI incentive scheme, earlier called the ‘Incentive Scheme for Promotion of RuPay Debit Cards and Low-Value BHIM-UPI Transactions (Person-to-Merchant)’. The cut-off has been used since the scheme began in FY2021-22 to identify low-value BHIM-UPI person-to-merchant (P2M) transactions eligible for incentives.

The scheme was designed to encourage digital payments, particularly among small merchants, while supporting banks and other payment ecosystem participants that could not recover costs through MDR.

In FY2024-25, the scheme was renamed the ‘Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions (Person to Merchant – P2M)’, with an estimated outlay of ₹1,500 crore. Small-merchant UPI P2M transactions of up to ₹2,000 qualified for an incentive of 0.15 per cent of the transaction value.

The incentive scheme, however, did not create the zero-MDR regime. UPI has been under a zero-MDR regime since January 2020 following amendments to Section 10A of the Payment and Settlement Systems Act, 2007, and Section 269SU of the Income-tax Act, 1961.

Under the FY2024-25 scheme, transactions above ₹2,000 at small merchants received no incentive but remained at zero MDR. Large merchants also received no incentive, irrespective of transaction value, while MDR remained zero.

Tanvi Kanchan, associate director at Anand Rathi Share and Stock Brokers, told Business Standard that the rationale was to support small, price-sensitive merchants while keeping the government’s subsidy bill manageable.

“₹2,000 was originally a fiscal-targeting line for subsidy, not a payments-cost line,” she said.

An old cut-off in a new MDR debate

The amendment to Section 10A replaces the earlier reference to payment modes prescribed under Section 269SU of the Income-tax Act with a provision allowing the central government to specify, through notification, one or more electronic payment modes on which banks and system providers cannot impose charges. It does not itself impose an MDR, prescribe a rate or set ₹2,000 as a threshold.

Reuters reported earlier this month that policymakers were considering different approaches, including imposing MDR on transactions above a specified value and linking charges to merchant turnover. One proposal under discussion used ₹2,000 as the transaction threshold for larger merchants. No final framework has been notified.

Kanchan said ₹2,000 should therefore be viewed as a possible reference point rather than an existing regulatory threshold.

Why ₹2,000 could make sense

There is also a mathematical reason why ₹2,000 has emerged as a possible reference point.

“Only about 4 per cent of P2M UPI transactions were above ₹2,000 in FY2025-26, but that slice accounted for roughly two-thirds of total transaction value,” Kanchan said.

“That’s the mathematical case for the threshold is that it protects the overwhelming majority of transaction count, routine purchases like milk, vegetables, groceries, while still letting the framework capture most of the value moving through the system, which is where recoverable cost genuinely concentrates,” she added.

Who would pay MDR?

MDR is a merchant-side charge, rather than a fee that is automatically levied on the customer. The government’s stated intent is to keep UPI free for consumers and apply any future MDR only to a limited set of merchant transactions.

According to Kanchan, the likely economic arrangement would involve larger merchants bearing the charge, with banks and payment service providers receiving part of the fee to recover the cost of processing and maintaining the payments infrastructure.

“Banks and payment providers would get a legal route to recover processing, settlement and infrastructure costs directly from large merchants, rather than relying solely on central incentives,” Kanchan said.

However, whether merchants eventually absorb the cost or pass some of it on through prices is yet to be known.

The ₹2,000 myth

For consumers and merchants, the most important point is that ₹2,000 is not an announced MDR threshold. Kanchan said the biggest misconception is that the existing incentive cut-off and a possible future MDR threshold are the same thing.

“Because both reference the same number, it reads in public discourse as if the government has already decided ₹2,000 is where UPI charges kick in,” she said. “In fact, policymakers are considering a ₹2,000 threshold, but the government has not officially confirmed this limit.”

For now, a UPI payment above ₹2,000 does not automatically attract MDR. The number has a clear history in the government’s incentive architecture and has emerged as one possible reference point in the current policy debate, but its role in any future UPI pricing framework remains undecided.

FAQs:

 

Will I be charged for making a UPI payment above ₹2,000?

 

Not under any announced MDR rule. The government has not notified ₹2,000 as a UPI MDR threshold. Any future charge would require a separate framework.

 

Why does ₹2,000 keep appearing in UPI MDR reports?

 

Because ₹2,000 has been the cut-off for the government’s low-value UPI incentive scheme since FY2021-22. For FY2024-25, small-merchant transactions up to ₹2,000 qualified for a 0.15 per cent incentive while MDR remained zero.

 

Will small merchants have to pay MDR?

 

The finance minister has said small traders such as vegetable sellers, tea vendors and hawkers will not be covered by the proposed MDR.