EconomyGS2+ GS3

Parliament amends Payment Act, enabling future UPI transaction charges

Indian Express·2026-08-22· Read original

"Parliament amends Payment Act, enabling future UPI transaction charges"

Prelims Facts

•NPCI was incorporated in 2008 as a not-for-profit entity under the Payment and Settlement Systems Act, 2007.
•Section 10A of the PSS Act (inserted by Finance Act, 2020) barred any charge on BHIM-UPI and RuPay transactions.

Key Terms

Merchant Discount Rate (MDR)

Fee a merchant pays its bank for accepting digital payments, split among acquiring bank, issuing bank, and payment network.

NPCI (National Payments Corporation of India)

Not-for-profit umbrella body for retail payments in India, operating UPI and RuPay under the PSS Act, 2007.

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Study Note

BackgroundCore Concept

Background

India's digital payments ecosystem is governed primarily by the Payment and Settlement Systems (PSS) Act, 2007, which gives the Reserve Bank of India (RBI) authority to regulate and supervise payment systems. Within this framework, the National Payments Corporation of India (NPCI), a not-for-profit entity set up under the PSS Act, operates the Unified Payments Interface (UPI) and the RuPay card network. NPCI was incorporated in 2008 as an umbrella organisation for retail payments in India.

The Merchant Discount Rate (MDR) is the fee a merchant pays to its bank for accepting digital payments. It is typically split among the acquiring bank, the issuing bank, and the payment network. MDR was the standard revenue model for card-based payments globally. For UPI and RuPay, the government removed MDR through Section 10A of the PSS Act, inserted by the Finance Act, 2020, making these instruments free for both merchants and consumers. The government compensated banks and payment providers through a direct incentive scheme, which at its peak disbursed around Rs 3,631 crore annually.

The Topic Explained

UPI works on an open, protocol-based architecture. Before UPI, each bank operated a closed mobile application. UPI required banks to open their Application Programming Interfaces (APIs) to a shared protocol managed by NPCI. This allows any UPI-enabled app to move money between any two bank accounts, instantly and at no cost to the user. The model is fundamentally different from card networks: there is no physical terminal, no card, no credit-default risk, and settlement is near-instantaneous. NPCI operates the entire switch for approximately Rs 500 crore per year, translating to roughly two paise per transaction.

The MDR model was designed for a different cost structure, one involving physical point-of-sale terminals, card issuance, and credit risk underwriting. …

Related PYQs

2016GS1 Prelims

With reference to 'Financial Stability and Development Council', consider the following statements:

1.It is an organ of NITI Aayog.

2.It is headed by the Union Finance Minister.

3.It monitors macroprudential supervision of the economy.

Which of the statements given above is/are correct?

A1 and 2 only

B3 only

C2 and 3 only

D1, 2 and 3

2021GS1 Prelims

Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?

ADiversion of resources to the purchase of real estate and investment in luxury housing

BInvestment in unproductive activities and purchase of precious stones, jewellery, gold, etc.

CLarge donations to political parties and growth of regionalism

DLoss of revenue to the State Exchequer due to tax evasion

Practice MCQs

Polityeasy

The term 'Merchant Discount Rate (MDR)' in the context of digital payments refers to:

AThe discount offered by merchants to customers who pay digitally instead of using cash

BThe fee paid by a merchant to its bank for accepting digital payments, shared among the acquiring bank, issuing bank, and payment network

CThe interest rate charged by the RBI to banks that process digital payment transactions

DThe rate at which the government reimburses merchants for losses incurred due to failed digital transactions

Politymedium

Consider the following statements regarding the National Payments Corporation of India (NPCI):

1.NPCI is a for-profit company incorporated under the Companies Act.

2.NPCI operates both UPI and the RuPay card network.

3.NPCI was set up under the Payment and Settlement Systems Act, 2007.

Which of the statements given above is/are correct?

A2 only

B1 and 3 only

C2 and 3 only

D1, 2 and 3

Polityhard

Which of the following best explains why the 'work-done' principle from telecom interconnection regulation is cited as an argument against applying MDR to UPI transactions?

ATelecom companies charge a flat fee per call, and UPI should similarly charge a flat fee per transaction regardless of amount.

BOn UPI, the actual work performed — a debit entry, a settlement instruction, and a credit entry — costs approximately two paise per transaction, making a percentage-based MDR disproportionate to the cost.

CThe telecom sector is regulated by TRAI, and UPI should similarly be regulated by an independent payments regulator rather than the RBI.

DTelecom interconnection fees are paid by the government, and UPI infrastructure costs should similarly be borne entirely by the central government budget.

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