MDR Charges – UPI will not remain a mass product with MDR

In the last few weeks, a major debate has been stirred in the media; to charge or not to charge MDR on UPI transactions. The government has passed enabling legislation, but that does not mean MDR will be charged!

First step to imposing MDR on UPI

On 06-August, the government amended the Payment and Settlement Systems Act 2007. The amendment specifically removes the blanket legal prohibition (zero-MDR) on UPI transactions. That was introduced to make UPI as a payment mechanism more popular. In recent months, banks and fintech companies have been demanding an MDR on UPI transactions to partly defray the cost of infrastructure. However, the zero-MDR policy has boosted volumes in UPI beyond the wildest imagination. For FY26, UPI recorded a total of 24,162 crore annual transactions entailing money movement of ₹314 trillion.

Not all UPI transactions will attract MDR

While the government has passed the enabling legislation on MDR on UPI, the finer points are yet to be worked out. There are some early indications. For starters, UPI transfers of up to ₹2,000 will likely be exempt from MDR. Secondly, the government may exempt education institutions and hospitals from MDR on UPI payments. The MDR may be limited to large private P2P transfers and major big-ticket transactions at merchants. The rate of MDR is also not too evident at this point. Banks and fintech companies are demanding MDR rates of 0.3%-0.4%, but that could change the economics of UPI. To keep UPI attractive, the government may opt to start with a more reasonable 0.10-0.15%

Will MDR kill the goose that lays golden eggs?

There is the outside risk that MDR could kill the idea of UPI, or at least, reduce its relevance in the Indian financial ecosystem. Today, UPI is not just a mode of transferring money, but plays a much bigger role. It has compressed the financial distance between rural India and urban India in a unique way. It is much simpler than NEFT or IMPS and that makes it a lot more accessible. UPI in India has achieved efficient demonetization and has reduced the usage of cash as currency. Above all, UPI has introduced unprecedented efficiencies into payment systems, healthcare delivery, spreading education, and making capital market transactions smoother. It is not worth losing all these.

Let banks bear the cost of UPI

There is a cost at the NPCI end for running the switch layer, which is just about ₹500 crore a year. It is estimated that banks and fintech companies are spending around ₹5,000 crore as allocated expenditure to enable UPI on their platforms. To raise that kind of money, an MDR levy of 10-15 basis points on transactions above ₹2,000 will be enough to cover the cost of running UPI. But that still risks killing the goose that lays the golden eggs for the government. Ideally, the banks should foot this cost. In FY26, banks collected ₹7,100 crore as minimum balance penalties from depositors. They just need to use 70% of that money to provide UPI free of cost. It is actually worth doing it!