- Why in news
- On 15 September 2026, the Finance Ministry clarified the new UPI framework: P2P transfers stay free, and MDR applies only to specified merchant payments above ₹2,000.
- What it is
- Merchant Discount Rate (MDR) is the fee a merchant pays its bank for accepting a digital payment. It is shared among the banks and payment service providers in the chain. UPI, run by NPCI, was kept at zero MDR for years, which raised questions about who bears the cost of running it.
- Legal basis
- The framework is introduced under the Payment and Settlement Systems Act, 2007, after deliberation by the UPI Steering Committee.
- Essential sectors
- Transactions above ₹2,000 in railways, telecom, insurance, fuel and agricultural inputs attract a flat ₹5 per transaction.
- Capital markets
- Payments for mutual funds, securities, and stockbrokers and dealers attract 0.02% MDR, capped at ₹300.
- Who gets MDR
- MDR is not a tax or a charge collected by the Government or NPCI. It is shared among ecosystem participants.
- Who signed
- NIPL, the international arm of NPCI, signed with NIPC JSC, which operates Uzbekistan's national payment system HUMO.
- What it enables
- Indian travellers can scan Uzbekistan's interoperable QR code UZQR with UPI-enabled apps to pay merchants.
- Regulatory approvals
- The RBI and the Central Bank of Uzbekistan approved the arrangement and designated HUMO as NIPL's authorised partner for cross-border merchant acceptance.
- Type of payment
- The payments are direct person-to-merchant (P2M) from Indian bank accounts, avoiding foreign exchange markup.
- UPI abroad
- The release lists ten countries where UPI is accepted: Singapore, UAE, France, Mauritius, Nepal, Bhutan, Qatar, Sri Lanka, Cambodia and Greece.
- Launch and operator
- UPI was launched on 25 August 2016 by NPCI, under RBI regulatory oversight.
- Global standing
- The IMF recognises UPI as the world's largest real-time payment system by transaction volume.
- Cross-border reach
- UPI is operational in 11 countries, including UAE, France, Bhutan, Sri Lanka, Nepal and Singapore.
- MDR
- MDR is the fee a merchant pays its bank for accepting digital payments; UPI has long been kept at zero MDR.
- Legal change
- The Taxation and Other Laws (Amendment) Bill, 2026 proposes to amend Section 10A of the Payment and Settlement Systems Act, 2007. It is an enabling provision, not a charge in itself.
- Who decides
- After the Bill passes, the UPI and Services Steering Committee, headed by NPCI, will decide on MDR, if any.
- Zero-MDR history
- UPI was introduced in 2016 and has been free for merchants and citizens since January 2020.
- Operator
- UPI is run by the National Payments Corporation of India (NPCI), an umbrella body for retail payments set up with RBI guidance.
Don’t confuse with P2P vs P2M vs P2PM: P2P is person to person and is always free. P2M is person to merchant and attracts MDR above ₹2,000. P2PM is the category of small merchants using personal QR codes, which get zero MDR up to ₹1 lakh a month.
Don’t confuse with MDR vs daily transaction limit: MDR is a merchant fee. Daily limits of ₹1 lakh to ₹5 lakh are security and risk safeguards, not charging thresholds.
Don’t confuse with NPCI vs NIPL: NPCI runs UPI and other retail payment systems in India. NIPL is its international subsidiary that arranges overseas acceptance and tie-ups.
Don’t confuse with P2M vs P2P: P2M is a payment from a person to a merchant, as in this UZQR arrangement. P2P is a transfer between individuals, as in remittances.
Don’t confuse with MDR vs interchange: MDR is the total fee charged to the merchant; interchange is the part paid to the card-issuing or remitting bank.
Don’t confuse with P2P vs P2M: P2P moves money between individuals; P2M pays a merchant. P2M leads in volume, P2P in value.
Don’t confuse with PSS Act regulator vs operator: RBI regulates payment systems under the PSS Act, 2007. NPCI operates UPI.
Economy terms and data: 42 Prelims questions since 2013, rising in recent years; they test what a term or instrument means. In Mains, 12 news-triggered questions.
Why it matters
- Gives banks and payment providers a revenue stream to sustain UPI infrastructure.
- Keeps individuals and small merchants free of charges, protecting financial inclusion.
- Extends UPI as digital public infrastructure abroad and strengthens India's financial diplomacy.
- Cuts forex markup and card dependence for Indian travellers, students and business visitors.
- Boosts financial inclusion and formalisation through interoperable, low-cost digital payments.
- Gives India a globally recognised DPI model and a tool for soft power through cross-border links.
- A revenue model could fund fraud prevention, cybersecurity and upgrades for a system of 2,366 crore monthly transactions.
- It may bring more fintech and bank participation, and so more competition and rural reach.
Problems
- Merchants may pass MDR on to customers despite the prohibition, which is hard to monitor.
- Charges may discourage larger merchants from using UPI or push them to cards and cash.
- Cross-border links need regulator approvals and partner-country interoperability, which slows rollout.
- Revenue models and fees for foreign operators are unclear, as with the domestic MDR debate.
- Zero MDR leaves unclear who bears the cost of running UPI, which strains banks and payment providers.
- Heavy concentration in a few apps and an operator raises systemic risk, and outages and fraud affect trust.
- Even a small MDR could push small merchants back to cash and slow formalisation.
- Trust in a free public good may fall if the government's messaging is unclear, and a threshold may be hard to design.
Way forward
- Monitor pass-through by merchants and enforce the ban on platform fees and hidden charges.
- Review rates periodically using data on adoption and costs, and use the small-merchant fund well.
- Expand bilateral links and work towards linking UPI with more national fast-payment systems.
- Keep clear rules on fees, security and dispute resolution for cross-border payments.
- Settle a sustainable cost-sharing model, such as targeted incentives or MDR for large merchants, without hurting small merchants.
- Diversify the app market, strengthen fraud controls and operational resilience.
- Set a transparent, rule-based threshold and rate, with consultation, and exempt small merchants and P2P.
- Consider other ways to fund UPI, such as targeted incentives and cost sharing, and publish cost data.
Put in your answer
P2P share of value: UPI transactions making up 70% of total transaction value stay outside the MDR framework.
Parliamentary panel: The framework is consistent with the Standing Committee on Finance's 32nd Report, which stressed a viable revenue model.
UPI's overseas reach: UPI is accepted in ten countries per the release, a point for answers on digital public infrastructure and soft power.
UPI scale: UPI volume rose from 1.78 crore transactions in FY17 to over 24,162 crore in FY26.
Micro-payments: 86% of P2M transactions are below ₹500, showing use in everyday small retail.
Self-sustainability argument: Government says reliance on subsidies alone is not viable for the next wave of growth.
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UPSC’s own questions that come close to this issue, from our Prelims and Mains banks.
Prelims practice · Statements
Ours, not from a UPSC paper
Consider the following statements:
- 1.The new UPI framework on Merchant Discount Rate has been introduced under the Payment and Settlement Systems Act, 2007.
- 2.MDR on UPI merchant payments is a tax collected by the Government and deposited with NPCI.
- 3.Under the framework, a flat MDR of ₹5 per transaction applies to transactions above ₹2,000 in sectors such as railways, insurance and fuel.
Which of the statements given above is/are correct?
True or false?
1 of 21
Statements the way Prelims prints them. Say first, then see the fact.
1.The new UPI framework is introduced under the Payment and Settlement Systems Act, 2007.
True. The framework is under the Payment and Settlement Systems Act, 2007.
2.MDR collected on UPI is a tax levied by the Government and deposited with NPCI.
False. MDR is neither a tax nor a charge collected by the Government or NPCI; it is shared among banks and payment providers.
3.A 0.4% MDR applies to person-to-merchant UPI transactions above ₹2,000.
True. 0.4% applies only to P2M transactions above ₹2,000.
4.Person-to-person UPI transfers above a certain amount attract MDR under the framework.
False. All P2P transactions remain free irrespective of amount.
5.Transactions above ₹2,000 in sectors such as railways, insurance and fuel attract a flat MDR of ₹5 per transaction.
True. Essential and thin-margin sectors get a flat ₹5 MDR.
6.A fund for small-merchant UPI adoption will receive 5% of total MDR collections.
True. 5% of MDR collections go to the dedicated fund.
7.UPI was launched in 2016 by the National Payments Corporation of India under the regulatory oversight of the Reserve Bank of India.
True. NPCI launched UPI on 25 August 2016 under RBI oversight.
8.The International Monetary Fund has acknowledged UPI as the world's largest real-time payment system by transaction value.
False. The IMF acknowledged it as the largest by transaction volume.
9.Person-to-merchant transactions make up the larger share of UPI transaction volume, while person-to-person transactions make up the larger share of value.
True. P2M is 63% of volume; P2P is 71% of value.
10.UPI is currently operational in 11 countries, including Bhutan, Nepal and Singapore.
True. UPI operates in 11 countries including Bhutan, Nepal and Singapore.
11.UPI accounts for nearly 49 per cent of the world's real-time payment transaction volume as of 2025.
True. UPI's share of global real-time volume is about 49% (2025).
12.Merchant Discount Rate is the fee a bank pays to NPCI for every UPI transaction it processes.
False. MDR is the fee a merchant pays its bank for accepting a digital payment.
13.Among UPI P2M transactions, a majority are small-ticket payments below ₹500.
True. 86% of P2M transactions are below ₹500.
14.NPCI is a statutory body set up under an Act of Parliament to regulate all payment systems in India.
False. RBI regulates payment systems under the Payment and Settlement Systems Act, 2007; NPCI is an umbrella organisation that operates retail payment systems.
15.The proposed amendment to the Payment and Settlement Systems Act, 2007 concerns Section 10A of the Act.
True. The Bill proposes to amend Section 10A of the PSS Act, 2007.
16.After the amendment, the Reserve Bank of India's Monetary Policy Committee will decide on MDR for UPI.
False. The UPI and Services Steering Committee headed by NPCI will decide on MDR, if any.
17.The Government has said any MDR on UPI, if introduced, would apply only to a limited set of merchant transactions above a threshold.
True. MDR, if introduced, will be threshold based and not levied on all.
18.The Government has said that Person-to-Person UPI transactions may attract a nominal charge once MDR is introduced.
False. All P2P transactions will continue to be free of charge.
19.UPI has been free of charge for both merchants and citizens since January 2020.
True. Zero MDR has applied since January 2020.
20.UPI is operated by the Reserve Bank of India directly through its Department of Payment and Settlement Systems.
False. UPI is operated by NPCI; RBI is the regulator under the PSS Act.
21.MDR is the fee a merchant pays for accepting a digital payment, and it is shared among the banks and service providers in the chain.
True. MDR is a merchant-paid acceptance fee shared across the payment chain.
Written by us from the release, not by UPSC; checked by a second model.
Mains practice
15 marks · 250 words
The Finance Ministry has clarified that UPI stays free for person-to-person transfers and for merchant payments up to ₹2,000, with a Merchant Discount Rate applying only to specified larger merchant payments. Examine the rationale for introducing MDR on UPI and discuss the challenges it poses for small merchants, consumers and the growth of digital payments in India. Suggest a way forward.
Worth revising until Prelims 2028: most news questions come within two years of the event.