MDR on UPI payments: Six rules govt must settle before charges can start

New Delhi, Aug 17, 2026

The Bill opens the door to selective UPI MDR, but leaves the operating details undecided. Here are six questions the final framework will need to answer before any charge takes effect

The Taxation and Other Laws (Amendment) Bill, 2026 made headlines last week after raising concerns that the Unified Payments Interface (UPI) may no longer remain free for users. However, Finance Minister Nirmala Sitharaman cleared the air, saying consumers would continue to make payments without any charges, while any future MDR would be restricted to certain categories of merchant transactions.

“No MDR framework has been yet been finalised,” she said in Rajya Sabha.

What is worth noting is that the Bill itself does not set an MDR rate or specify the merchants or transactions that could eventually attract the charge. It changes the legal framework governing charges on electronic payments, leaving the operating details of any future MDR regime to be decided separately.

What does the Bill propose?

The Bill proposes to amend Section 10A of the Payment and Settlement Systems Act, 2007. It replaces the existing reference to electronic payment modes prescribed under the Income-tax Act with “one or more electronic modes of payment as the Central Government may, by notification, specify”.

The Bill also provides that “no bank or system provider shall impose, whether directly or indirectly, any charge upon a person making or receiving a payment” through the electronic modes specified by the Union government.

The government has since clarified that consumers will not pay a transaction charge for UPI payments. It said any MDR, if introduced, would apply only to a limited set of merchant transactions above a specified threshold and at a nominal rate. The rate, it said, would be lower than MDRs charged on debit and credit cards.

The government has also said the UPI and Services Steering Committee headed by NPCI will decide on MDR, if any, after the Bill is passed.

That leaves several operational questions for any future framework. 

1. Who qualifies as a chargeable merchant?

The Bill does not define which merchants would be liable for MDR.

The government has said any future MDR would apply only to a limited category of merchant transactions above a specified threshold. It has not specified the categories or the threshold.

The first question for the framework, therefore, is how the eligible merchant category will be defined.

The test could be based on annual turnover, transaction volume, transaction value, merchant category or a combination of these. The Bill does not prescribe any of these criteria.

2. What triggers MDR?

The Bill does not specify the transaction-level conditions for a possible MDR.

A future framework will need to clarify whether the charge applies because a merchant crosses a particular turnover or transaction threshold, because an individual payment exceeds a specified value, or because both conditions are met.

The government's clarification said the possible MDR would apply to merchant transactions “above a specified threshold”.

It does not specify whether that threshold would refer to the merchant's overall business or the value of individual transactions.

3. Will the charge be percentage-based or capped?

The Bill does not specify an MDR rate or how a possible charge would be calculated.

The government has said any future MDR would be imposed at a “nominal rate” and would be lower than MDRs charged on debit and credit cards. It has not announced a percentage, fixed amount or cap.

The framework will therefore need to settle whether MDR is calculated as a percentage of the transaction value, set at a fixed amount or subject to a maximum charge.

This will determine how the charge applies to payments of different values. 

4. Who receives the MDR revenue?

The Bill does not contain a revenue-sharing mechanism for any possible MDR.

A future framework will need to establish how the proceeds of an MDR are distributed among participants in the payment ecosystem.

These could include the issuing bank, acquiring bank, UPI application, payment-service-provider bank, payment aggregator and NPCI.

The Bill's amendment concerns the authority to specify electronic payment modes and the application of the charge prohibition. It does not prescribe the commercial arrangement between participants in a possible MDR system.

The government has said the proposed change is intended to support the long-term sustainability of UPI and continued investment in cybersecurity, fraud prevention and infrastructure.

How those costs are recovered and distributed, however, is not set out in the Bill.

5. Can merchants pass the charge to customers?

The government has said consumers will not face transaction charges for using UPI. It has also said all person-to-person UPI transactions will remain free and that the vast majority of merchant transactions will remain free.

The Bill's provision is framed around charges imposed on a person “making or receiving a payment” through specified electronic modes.

If a separate MDR framework places the charge on selected merchants, it will need to clarify how that cost can be treated by merchants.

That includes whether merchants can recover the cost through a separate surcharge, changes to discounts or minimum-payment conditions.

The Bill does not set out rules for these situations.

6. What happens to refunds, reversals and failed payments?

It does not specify how a possible MDR would be treated when a transaction is subsequently reversed, refunded or disputed.

A future framework will need to establish whether and how MDR is reversed when a transaction is cancelled or only partly refunded.

The future framework on MDR will also need to specify the treatment of failed payments and disputed transactions if an MDR has already been applied. These operating rules are not contained in the Bill. 

[The Business Standard]