The introduction of the Merchant Discount Rate (MDR) on UPI transactions is expected to bring the government, the banks, the merchants and the payment industry stakeholders into discussions over how the cost of the digital payments should be managed. According to the report, the MDR on the UPI transactions will come into effect from October 15, after which the government will hold discussions with the Indian Banks’ Association (IBA) to decide how much subsidy should be continued and in what form.
The issue has gained importance because the MDR collected from merchants is not expected to be enough to cover the complete cost of operating and maintaining the UPI payment infrastructure. The government is therefore examining the level of the financial support that may be required to sustain the digital payment ecosystem.
Government to discuss subsidy with banks
The Ministry of Finance will coordinate with the IBA to determine the appropriate amount and the structure of the subsidy. A senior official from the Ministry of Finance said that the MDR amount collected would not be sufficient to cover the full cost of the UPI. The government is already providing the incentives to encourage the digital payments, particularly through the RuPay debit cards and the low-value BHIM-UPI transactions.
For the ongoing financial year, the government has budgeted ₹2,000 crore under its incentive scheme for the promotion of the RuPay debit cards and the low-value BHIM-UPI transactions.
The government also wants to ensure that the merchants do not pass the MDR charge on to the consumers. The Ministry of Finance is expected to discuss the matter with the IBA and work out the mechanisms to ensure that the customers are not forced to bear the additional cost.
The government will also engage with the traders and their representative organisations. The Confederation of All India Traders (CAIT) is expected to be among the organisations that are involved in the discussions to explain the MDR mechanism and clarify how the charge is expected to affect the merchants.
Previous government expenditure on UPI incentives
The expenditure under the incentive scheme launched by the government has increased substantially over the years. In 2021–22, the government has paid ₹957 crore for the transaction conducted at the BHIM-UPI platform and ₹432 for the transactions crore for the transactions conducted at the RuPay debit card, taking the total payout to ₹1,389 crore.
In 2022–23, the BHIM-UPI payout increased to ₹1,802 crore, while the RuPay debit card component stood at ₹408 crore. Together, the total payout was ₹2,210 crore.
The expenditure increased further in 2023–24, when the amount of ₹3,268 crore was paid under the BHIM-UPI component and ₹363 crore for RuPay debit cards, taking the total payout to ₹3,631 crore.
For 2024–25, the report records ₹1,046 crore as the actual expenditure under the BHIM-UPI component as of November 30, 2025. The scheme for that financial year covered the low-value BHIM-UPI transactions and had an estimated outlay of around ₹1,500 crore.
These figures indicate the scale of the government support that has been provided to encourage the digital payments and to maintain the growth of low-value UPI transactions.
Petroleum dealers raise concerns over MDR
The MDR issue has also become a concern for the petroleum dealers and their associations. According to the report, the Ministry of Petroleum will engage with the petroleum dealers to address their concerns about the charge.
The petroleum dealers have raised the concerns that the MDR could affect their profit margins and have sought a waiver from the charge. However, the officials have clarified that there is no proposal to waive the MDR for the petroleum dealers.
Instead, the Ministry of Petroleum and Natural Gad is expected to discuss the issue with the dealers and consider their concerns regarding the margins they earn. One of the arguments presented by the dealers is that the MDR could reduce their existing profit margins, which is why they have asked the government to review the issue.
GST treatment of MDR
Another important question relates to the Goods and Services Tax (GST) applicable to the MDR.
A government official clarified that the Ministry cannot independently decide whether the GST should be imposed on the the amount of the MDR collected by the payment processors and the banks from the merchants.
The explanation is that the UPI is a service and the MDR represents a charge for providing that service to the merchants. Since the GST matters fall within the jurisdiction of the GST framework, any decision regarding the GST rate or the exemption would have to be decided by the GST Council.
Therefore, the Centre cannot unilaterally decide the GST treatment of the MDR.
What lies ahead?
The discussions between the government, banks, traders and the other stakeholders will determine how the MDR system and the subsidy mechanism will develop after October 15. The government will have to balance the cost of maintaining the Indian digital payment infrastructure with the interests of the merchants and the consumers.
The issue is particularly important because the UPI has become a major part of the digital payment ecosystem of India. Any additional cost imposed on the merchants could affect their willingness to accept the digital payments, while the continued government support would have the financial implications for the public exchequer.
The upcoming discussions will therefore focus on the size of the subsidy, the form in which it will be provided, the impact of the MDR on the merchants, the concerns of the petroleum dealers and the applicable GST treatment.