The Government's zero Merchant Discount Rate (MDR) policy for Unified Payments Interface (UPI) transactions is facing mounting pressure as payment operators seek a sharp increase in subsidy funding ahead of the 2026 Union budget. While the government allocated only Rs 427 crore for digital payment incentives this financial year, industry estimates suggest that over Rs 6,000 crore is needed to sustain the zero-MDR model for low-value UPI payments below Rs 2,000, currently absorbing costs entirely borne by banks and fintech companies.

Since January 2020, the zero-MDR policy has allowed merchants to accept UPI payments without incurring any processing fees, fueling UPI's explosive growth in India’s digital payments ecosystem. However, this rapid expansion, with October 2025 transactions crossing 2,070 crore valued at Rs 27.28 lakh crore, has made the existing subsidy framework financially unsustainable. Payment operators argue that the current government allocation fails to cover infrastructure, security, compliance, and onboarding costs, putting the long-term viability of free UPI transactions at risk.

Industry representatives have reportedly proposed introducing a nominal MDR of 0.25–0.30% on low-value UPI transactions processed by large merchants with annual turnovers exceeding Rs 10 crore. This would mean small and medium merchants retain zero MDR while bigger players contribute to system costs. The move aims to balance digital payment adoption with the financial health of banks and payment technology providers. Previous subsidy budgets peaked at Rs 3,500 crore in 2023-24 but sharply dropped to Rs 427 crore for 2025-26 — a gap that deepens the sustainability challenge.

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Despite these reports, the Finance Ministry has publicly dismissed claims of imminent MDR imposition on UPI transactions as "completely false, baseless, and misleading," reaffirming the government's commitment to keeping UPI free for merchants and consumers. The ministry highlights ongoing efforts to boost digital payment infrastructure, innovation, and financial inclusion without imposing charges that could hinder adoption.

As UPI continues to dominate over 85% of India’s digital transactions by volume, the debate over MDR underscores the tension between promoting affordable digital payments and ensuring economic sustainability for payment ecosystem players. The upcoming budget consultations will be critical in deciding whether India maintains its zero-MDR stance or introduces measured fees to support long-term growth and system resilience.

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