What will change once MDR is implemented on UPI, and will customers have to pay extra charges?

Millions of people in India now make payments via UPI. A major change regarding UPI is currently being discussed in the country. Following the passage of the Taxation and Other Laws (Amendment) Bill, 2026, during the Parliament's monsoon session, consideration is being given to imposing a Merchant Discount Rate (MDR) on select UPI transactions. MDR is a charge paid by merchants to banks or payment companies in exchange for providing digital payment services. However, a final decision regarding the rate and the specific transactions to which it will apply has not yet been made. Finance Minister Nirmala Sitharaman has clarified that this charge will be levied on merchants, not directly on customers.

Interestingly, while there is talk of imposing charges on UPI, the amount of cash held by the public is also rising. According to RBI data, cash holdings surged during the COVID-19 pandemic. Although the pace slowed subsequently, an upward trend is visible again. In 2025-26, cash held by the public increased by approximately 12%. By July 31, 2026, it had reached around ₹41.8 lakh crore—an increase of nearly 13% compared to the same period the previous year. Meanwhile, the growth rate of UPI transactions has slowed down compared to earlier levels.

Why has the pace of UPI slowed?
According to NPCI data, while UPI usage continues to rise, its annual growth rate is no longer as rapid as it once was. A report by *The Hindu* indicates that the volume of UPI transactions grew by approximately 133% in 2019-20. There was a sharp surge following the pandemic, but the pace of growth has since moderated. In the 2025-26 financial year, UPI transaction growth stood at around 20.3%. For the period from April to August of the 2026-27 financial year, the growth rate was approximately 18.7%.

However, this growth rate still exceeds the ~13% increase in cash held by the public. This does not imply that people are abandoning UPI; rather, it indicates that the expansion of digital payments is no longer occurring at the breakneck speed seen in the initial years.

What is MDR, and to whom might it apply?

MDR, or Merchant Discount Rate, is a charge levied on merchants for providing digital payment services. Currently, MDR is not charged to customers or merchants for standard UPI payments. However, a proposal is under consideration to levy an MDR of 0.3% to 0.5% on certain large UPI transactions.
Under the proposed framework, transactions exceeding ₹2,000 and merchants with an annual turnover of over ₹1.5 crore would fall within this scope. While such transactions account for approximately 4% of the total volume of UPI transactions, they represent about 67% of the total transaction value. The final charge amount and the mechanism for its distribution have not yet been determined. The government has not proposed charging customers directly for UPI payments.

What is the impact on Paytm and other payment companies?
The implementation of MDR will not affect all payment companies in the same way. A company's benefit will not depend solely on the volume of UPI transactions on its platform; the number of affiliated merchants and the value of transactions processed through the platform will also be significant factors. While large businesses might easily absorb this additional cost, small merchants could be more significantly impacted. This shift could prompt payment companies to focus on the revenue generated from each transaction rather than just maximizing transaction volumes.

Brokerage firm Jefferies estimates that MDR could generate between ₹5,000 crore and ₹10,000 crore in annual revenue for the entire payment industry. Paytm is also expected to benefit, although actual earnings will depend on the final MDR rates and regulations.

Will UPI remain free for customers?
Current indications suggest that customers will not have to pay any charges for using UPI. PhonePe co-founder and CEO Sameer Nigam has also stated that UPI will remain free for Indian customers. However, if shopkeepers incur additional costs, the question remains whether this could impact the prices of goods or services. The RBI Governor has also noted that there are costs associated with investing in and operating large-scale digital payment systems. Consequently, the future framework will depend on how the government implements the MDR and who bears the associated costs.

Disclaimer: This content has been sourced and edited from News18 Hindi. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.