Zero MDR for UPI no More (Maybe?)
| AUTHOR | Anupam Manur |
| DATE | August 6, 2026 |
| CATEGORIES | Economic Policy |
Two months ago I argued on this blog that UPI’s second decade could not be financed by a shrinking government subsidy, and that a modest merchant fee on large merchants was the obvious way out. Though it is not a very popular argument, it has just become considerably less lonely.
On 4 August, the Finance Minister introduced the Taxation and Other Laws (Amendment) Bill, 2026, which amends Section 10A of the Payment and Settlement Systems Act — the clause that has enforced a blanket ban on merchant fees for UPI and RuPay debit cards since January 2020. The Lok Sabha passed it two days later. For the first time in six years, charging a merchant for a UPI transaction is not illegal.
This was also the same Bill which had an extension to the tax exemption for contract manufacturers until 2041. Luckily, I’ve written about that as well.
First things first. Nobody is being charged anything. The Bill does not set a rate, a threshold, or a merchant category. What it does is replace a statutory prohibition with a notification power: the government can now decide, by executive order, which payment modes stay exempt and which kind of transactions can get charged.. The RBI Governor called MDR talk “premature” the very next day and the opposition didn’t like it as well. The FinMin then clarified that this merely enables it for large merchant transactions, which is the right way to go.
Implementation
Some big design questions though:
The first is who sets the price. There is a real difference between the government permitting a fee and the government fixing one. If the eventual notification specifies a rate — 0.3%, or whatever number emerges from consultation — we will have swapped a bad price control (zero) for a slightly better one. Prices set by notification are prices set by lobbying, and they will be revisited every time an election approaches. Brazil’s Pix is instructive here not because its merchant fee is low, but because it is not administered: it averages around 0.22% because acquirers compete, not because a ministry decided so. India’s better path is a floor of exemptions, say for small merchants, P2P, and low-value transactions, and then competitive pricing above it.
The second is whether this actually fixes the duopoly. PhonePe and Google Pay control roughly 83% of UPI volume, and I have argued that zero MDR is a large part of why: you cannot build a challenger on a business with no revenue line. A merchant fee can change that arithmetic. But it changes it for whoever can already reach large merchants at scale, which, today, is the incumbents. Revenue is necessary for competition; it is not sufficient. BUT, NPCI’s 30% market share cap remains a blunt and, in my view, misconceived instrument.
The zero-MDR regime was a subsidy that was ill-founded, and it was always going to end. Now, this has to be rationalised and implemented in a way that will not kick up a political economy storm.