India Proposes Amendments to UPI Payment Rules, Potentially Allowing Merchant Discount Rate

The Indian government has proposed significant amendments to the Payment and Settlement Systems Act, potentially allowing for the reintroduction of a merchant discount rate (MDR) on Unified Payments Interface (UPI) payments. The proposed changes, part of a broader taxation and other laws amendment bill, aim to alter the existing prohibition on charging fees for UPI transactions.

The proposed rules would replace the current section that bars banks and system providers from "directly or indirectly" imposing any charge on UPI payments. However, the new legislation would permit specific online payment modes, as notified by the government, to be exempted from MDR, while leaving room for charges on others.

The amendment removes the reference to the Income Tax Act, effectively placing the decision-making power for pricing MDR directly under the Reserve Bank of India (RBI). This development occurs amidst renewed debate on whether banks, aggregators, and other financial institutions should be allowed to monetize UPI. UPI transactions have been operating under a zero-MDR regime for nearly six years, a factor that has driven widespread adoption of digital payments.

Industry insiders suggest that players in the payments ecosystem have long sought a change to cover the operational costs of the infrastructure powering digital payments. While the government has previously allocated funds to incentivize digital payments, the new norms could offer a mechanism for recouping investments. Earlier reports indicated the government was considering a targeted reintroduction of MDR for businesses with an annual turnover of ₹1 crore (approx. $1.2 million USD) or more, with an MDR of 0.05% to 0.07% on UPI transactions exceeding ₹2,000 (approx. $24 USD).

UPI continues to experience rapid growth despite the MDR discussions. In July, the payment infrastructure processed 2,366 crore transactions, a 4% increase from the previous month. The total transaction value rose 3% to ₹29.88 lakh crore during the month. The amendments will take effect upon their publication in the official gazette.