Parliamentary panel has recommended the re-introduction of the same, citing the need for a stable revenue mode for fintech companies facilitating the services
The Standing Committee on Finance said that the current zero-MDR regime puts pressure on government finances as well as limiting the ability of the ecosystem to invest in long-term infrastructure
MDR is a fee paid by merchants to banks and payment service providers for processing digital transactions
Amid debate around merchant discount rate (MDR) on UPI transactions, a parliamentary panel has recommended the re-introduction of the same, citing the need for a stable revenue mode for fintech companies facilitating the services.
In a report presented in Parliament on March 12 (Thursday), the Standing Committee on Finance said that the current zero-MDR regime puts pressure on government finances as well as limiting the ability of the ecosystem to invest in long-term infrastructure.
“The committee would like to emphasise that establishing a viable revenue mechanism is critical to ensuring the UPI ecosystem achieves financial sustainability without perpetually straining the government exchequer,” the panel said in its report on the Demands for Grants of the Ministry of Finance’s Department of Financial Services.
For context, MDR is a fee paid by merchants to banks and payment service providers for processing digital transactions. The Central Board of Direct Taxes (CBDT) removed the MDR on Person-to-Merchant (P2M) UPI transactions via a gazette notification in 2020.
Industry bodies like the Payments Council of India (PCI) have been urging the government to restore MDR on UPI payments so that companies involved in the ecosystem can generate direct revenue.
At present, the government compensates banks for offering UPI and RuPay debit card transactions without MDR. In the Union Budget 2026-27, the central government allocated ₹2,000 Cr under an incentive scheme to promote transactions made using RuPay debit cards and low-value payments through BHIM-UPI of up to ₹2,000.
The allocation is nearly five times higher than the ₹437 Cr budgeted for FY26, though it is slightly lower than the revised estimate of ₹2,196 Cr for the year.
Introduced in the Union Budget 2021-22, the scheme reimburses banks for the cost of processing RuPay debit card and small-ticket UPI transactions so that customers and small merchants can use digital payments at zero or very low cost.
However, the committee said the incentive scheme covers only a small part of the industry’s actual costs. According to the report, the current government incentive accounts for around 11% of the sector’s real expenses and roughly 14% of potential MDR collections, creating a structural funding gap that could affect long-term infrastructure investment.
The panel also suggested using cashback and multi-year subsidy schemes to accelerate digital payments adoption in tier-three to tier-six cities.
It noted that UPI’s growth is currently concentrated in large urban centres, with smaller towns still lagging behind in adoption. As a result, the committee warned that the government’s digital payments agenda could take longer to achieve.
However, the committee expects strong long-term expansion of the payments system. It estimated that about 600 Mn new users could join the UPI ecosystem, potentially taking the total number of digital payments users to nearly one billion.
The panel also projected that UPI could scale up to around 150 Bn transactions per month at its peak over the next five to seven years.
In 2025, the UPI ecosystem processed 185 Bn transactions, achieving about 91% of its annual target of 203 Bn. In the current financial year, about 77% of the 230 Bn transaction target had been achieved as of December.
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