Finance Minister Nirmala Sitharaman on Monday sought to calm a growing political and industry debate over the proposed Merchant Discount Rate on select high-value UPI transactions, saying the levy is not a tax, cess or surcharge and will not be passed on to consumers.
"This is not a tax, this is not a cess, this is not even a surcharge. And the collection is not coming to the Consolidated Fund of India," Sitharaman told PTI, firmly rejecting Opposition criticism that the move could amount to a fresh burden on digital payments users. She said the MDR is a charge within the digital payments ecosystem, levied by entities that facilitate UPI transactions, including payment service providers, the merchant's bank and other participants in the chain.
Her remarks come after the National Payments Corporation of India announced a 0.4% MDR on specified person-to-merchant UPI transactions above Rs 2,000 from October 15. Transactions up to Rs 2,000 and person-to-person transfers will continue to remain free, preserving the no-cost structure that has helped UPI become the country's dominant retail payment rail.
Sitharaman said the new framework should be understood as an ecosystem charge rather than a government levy. "This is not at all anything to do with the government," she said, adding that the MDR mechanism involves NPCI, merchants, banks, aggregators and other service providers. The finance minister said the charge would be shared among multiple participants to help maintain technology infrastructure and support improvements and innovation in digital payments.
According to the proposed structure, 40% of the MDR collected will go to customers' banks, 30% to the payment gateway, 20% to the UPI app and the remaining 10% to the sponsoring bank of the UPI app. Sitharaman said the charge will be borne within the merchant payment ecosystem and will not be passed on to consumers.
The minister also pointed out that merchants already pay MDR on credit and debit card transactions, arguing that the new arrangement should not be viewed as an exceptional burden on shoppers. She said RuPay transactions will remain free and no MDR will apply to UPI payments below Rs 2,000.
The NPCI's move, issued through a circular on September 15, is aimed at creating what it described as a sustainable revenue framework for the digital payments ecosystem. A dedicated fund to promote the use of UPI by small merchants is also expected to be set up, underscoring the effort to balance the rapid expansion of digital payments with the costs of maintaining the underlying infrastructure.
The policy is designed to leave the vast majority of users untouched. Officials estimate that about 96% of person-to-merchant UPI transactions will remain unaffected by the new framework. Small merchants collecting up to Rs 1 lakh a month via UPI QR codes will remain fully exempt from any new charge, shielding a large base of neighborhood retailers, service providers and micro-entrepreneurs from the MDR.
At the same time, the new structure introduces differentiated charges for certain sectors. Essential services such as railways, telecom, fuel and insurance will attract a flat Rs 5 fee per transaction above Rs 2,000. Capital market transactions, including mutual funds and stockbroking, will face a lower rate of 0.02%, capped at Rs 300. For larger merchant transactions, the MDR has been capped at Rs 300 for payments of Rs 75,000 or more.
The debate around the MDR reflects the broader tension in India's digital payments story: how to preserve the convenience and near-universal adoption of UPI while ensuring the ecosystem that powers it remains financially sustainable. UPI has become central to everyday commerce, from street vendors and kirana stores to large online platforms, and any suggestion of a new charge has drawn immediate scrutiny from merchants and consumers alike.
By insisting that the levy will not touch consumers and will not go to the government, Sitharaman has attempted to draw a clear line between a payments-network fee and a public tax. Whether that distinction satisfies critics may depend on how the charge is implemented in practice, and whether merchants absorb the cost or eventually adjust pricing. For now, the government is presenting the MDR as a targeted ecosystem mechanism meant to keep India's flagship digital payments system viable without diluting its mass-market appeal.