"Cash usage accelerates even as UPI MDR levy moves forward"
Merchant Discount Rate (MDR)
fee a merchant pays to a payment service provider, expressed as a percentage of transaction value, for processing a digital payment.
Zero-MDR policy
government mandate (2020) eliminating MDR on UPI and RuPay debit card transactions, treating digital payments as a subsidised public utility.
India's digital payments ecosystem was built on a deliberate policy of zero friction and zero cost. 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 across institutions. The foundational legislation is the Payment and Settlement Systems Act, 2007, 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. The state effectively treated the payment system as a public utility — analogous to physical currency — absorbing infrastructure costs rather than passing them to users or merchants.
The results were transformative. UPI grew into arguably the world's largest real-time retail payment system by volume. However, the financial architecture underpinning this growth was structurally strained: 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. The Standing Committee on Finance flagged this unsustainability, setting the stage for legislative intervention. The Taxation and Other Laws (Amendment) Bill, 2026, passed in the Monsoon session of Parliament, now removes the legal bar on levying surcharges on UPI and RuPay debit card transactions, enabling a Merchant Discount Rate (MDR) to be reintroduced under specified conditions.
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, historically 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, interoperability layers, and bank settlement systems — was funded through government subsidy rather than user fees.
The government has indicated that the reintroduced MDR will initially apply only to transactions above ₹2,000 at merchants above a specified turnover threshold. The rationale is calibrated: just 4 per cent of person-to-merchant (P2M) transactions exceed this value, yet they account for approximately two-thirds of total P2M transaction value. …
Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is not correct?
Consider the following statements with respect to the digital rupee:
1.It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment with its monetary policy.
2.It appears as a liability on the RBI's balance sheet.
3.It is insured against inflation by its very design.
4.It is freely convertible against commercial bank money and cash.
Which of the statements given above are correct?
Which of the following is a most likely consequence of implementing the 'Unified Payments Interface (UPI)'?
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 the Merchant Discount Rate (MDR) on UPI transactions in India, consider the following statements:
1.The zero-MDR policy for UPI and RuPay debit cards was introduced in 2020.
2.The government's incentive scheme for payment service providers covered approximately 50 per cent of actual industry costs.
3.The Taxation and Other Laws (Amendment) Bill, 2026 enables the levy of MDR on UPI and RuPay debit card transactions.
4.Only 4 per cent of person-to-merchant UPI transactions exceed ₹2,000, yet they account for about two-thirds of total P2M transaction value.
Which of the statements given above are correct?
Consider the following assertion and reason:
Assertion (A): The government's proposed MDR on UPI transactions is designed to apply only above ₹2,000 at merchants above a specified turnover threshold.
Reason (R): Transactions above ₹2,000 constitute only 4 per cent of person-to-merchant UPI transactions by volume but account for approximately two-thirds of total P2M transaction value.
Which one of the following is correct?
Which of the following best describes the 'public-goods argument' as applied to UPI and digital payment infrastructure in India?
Want the full note, Prelims Facts & MCQ answers?
Create a free account — takes less than a minute.
Create free account