"Parliament amends law enabling surcharges on UPI and RuPay transactions"
Merchant Discount Rate (MDR)
fee charged to a merchant by a bank for processing a digital payment transaction.
Zero-MDR policy
2020 government policy eliminating MDR on UPI and RuPay debit card transactions to drive adoption.
India's digital payments architecture rests on a deliberate policy foundation: make transactions frictionless and free. The Unified Payments Interface (UPI), developed by the National Payments Corporation of India (NPCI) and launched in 2016, created a real-time, interoperable payment rail connecting any bank account holder. The Payment and Settlement Systems Act, 2007 is the foundational legislation, with the Reserve Bank of India (RBI) as the designated regulator. To accelerate mass adoption, the government introduced a zero Merchant Discount Rate (MDR) policy in 2020, eliminating the small percentage fee that banks and payment service providers had previously charged merchants for processing digital transactions. This was a conscious public subsidy: the state would absorb infrastructure costs rather than passing them to users or merchants, treating the payment system as a public utility analogous to physical currency.
The results were transformative. UPI now processes over 23 billion transactions monthly, making it arguably the world's largest real-time retail payment system by volume. The government disbursed approximately ₹8,730 crore over four years through an incentive scheme to compensate payment service providers — yet this covered only around 11 per cent of actual industry costs, leaving the ecosystem in a state of structural financial tension. The Standing Committee on Finance flagged this unsustainability, setting the stage for the current legislative intervention.
The Merchant Discount Rate (MDR) is the fee a merchant pays to a bank or payment service provider for processing a digital transaction, expressed as a percentage of transaction value. For credit cards in India, MDR ranges between 1 and 3 per cent; for debit cards, up to 0.9 per cent. The zero-MDR policy eliminated this for UPI and RuPay debit cards, meaning the entire payment infrastructure — servers, fraud detection, settlement systems, interbank clearing — had to be funded through government incentives rather than market fees.
The economic logic for zero-MDR draws on public goods theory. A public good is non-excludable and non-rivalrous; its benefits diffuse across the economy in ways that exceed what any individual user would willingly pay. Physical currency is the canonical example: the RBI prints notes and mints coins at public expense, distributing them to banks free of charge, because the lubricating effect of a frictionless medium of exchange generates economy-wide gains far exceeding the cost of production. …
With reference to digital payments, consider the following statements :
1.BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.
2.While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of authentication.
Which of the statements given above is/are correct?
With reference to India's decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct?
1.It is introduced as a part of the Income Tax Act.
2.Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the "Double Taxation Avoidance Agreements".
Select the correct answer using the code given below :
With reference to India's digital payments ecosystem, consider the following statements:
1.The zero-MDR policy, introduced in 2020, eliminated merchant fees on UPI and RuPay debit card transactions.
2.The government's incentive scheme disbursed over the past four years covered approximately half of actual industry costs.
3.Only 4 per cent of person-to-merchant UPI transactions exceed ₹2,000 by count, yet these account for roughly two-thirds of total P2M transaction value.
Which of the statements given above is/are correct?
The 'public goods' argument for zero-cost digital payments rests on which of the following economic principles?
1.Digital payment infrastructure is non-excludable and non-rivalrous in its economy-wide benefits.
2.Charging transaction fees reduces friction and thereby increases economic activity.
3.The multiplier effect of frictionless transactions exceeds the revenue recoverable through surcharges.
Select the correct answer using the code below:
Which of the following correctly describes the legislative basis for the recent amendment enabling surcharges on UPI transactions in India?
Which of the following best explains why the government's net fiscal cost of subsidising UPI is lower than the gross subsidy figure suggests?
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