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Informist, Thursday, Sept. 17, 2026

 

NEW DELHI – The government will monitor whether merchants pass on the merchant discount rate on Unified Payment Interface transactions to consumers rather than bear the cost themselves once the new rates take effect on Oct. 15, a senior finance ministry official said Thursday. The ministry will work with payment aggregators to monitor whether consumers are being charged fees for UPI transactions, as merchants are to pay such fees, the official said. 

 

The government Tuesday announced that merchant payments through the UPI above INR 2,000 will attract a merchant discount rate of 0.4% from Oct. 15, while person-to-person transactions will remain completely free. The fee will apply only to specified person-to-merchant transactions above INR 2,000, capped at INR 300 for transactions of INR 75,000 and above.  The merchant discount rate, commonly called MDR, is a fee a merchant pays to a bank to process digital payments through credit cards, debit cards, or UPI.

 

The government announced that no transaction fee, platform fee, or other charge can be imposed on individuals for sending or receiving money through UPI. However, consumers remain worried that merchants may eventually pass the fee on to consumers to protect companies' margins. With no clear legal framework to ensure the fee is not passed on to consumers, the government official said payment aggregators have verbally told merchants not to pass on the fee. 

 

For merchants, payments up to INR 2,000 will remain free of the merchant discount rate. Small merchants, including street vendors and neighbourhood shops, receiving up to INR 100,000 a month through UPI QR codes under the person-to-person-merchant category will also continue to enjoy a zero merchant discount rate on all transactions. As a result, around 96% of merchant transactions are expected to remain unaffected, the government official said. 

 

The official said the impact of the fee will only be known once the new framework is in place, and expressed confidence that it will not reduce UPI transactions. The government had originally made digital payments free from January 2020 to boost digital adoption. In August, however, Parliament passed a bill allowing the government to restore the merchant discount rate on digital transactions. The government amended the Payment and Settlement Systems Act, 2007, as part of broader amendments linked to the Income Tax Act.

 

The official said that the fee was levied as fintechs must have a natural revenue stream, which will help attract more participants in the sector. "MDR will be a readily available revenue stream for fintechs; there must be a stream of revenue if we want more participants," the official said. So far, the UPI ecosystem has been dominated by select players such as GPay, Paytm, and PhonePe. "You can keep a system running through subsidies, but that can't ensure innovation," the government official said. "There is a limit to innovation when subsidies are involved."

 

Another key issue that surfaced on various platforms was the 18% goods and services tax on the merchant discount rate that merchants will have to pay, which will raise the overall cost of accepting UPI payments. The official clarified that businesses registered under GST can claim input tax credit on the tax paid, while unregistered merchants may have to bear the cost themselves. 

 

The unregistered merchants are typically smaller businesses with a turnover of less than INR 4 million. Under the UPI fee framework, small merchants – those receiving up to INR 100,000 rupees per month via UPI – are exempt from paying the fee. This means, the official said, only a slice of merchants with sizeable UPI payments who are small businesses will have to pay GST without being able to claim credit. The GST Council can always address this, the official said, without detailing whether the issue will be taken up in the upcoming council meeting on Oct. 7.  End

 

Reported by Priyasmita Dutta

Edited by Saji George Titus

 

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