Finance Minister Nirmala Sitharaman has moved to dispel confusion surrounding the newly introduced Merchant Discount Rate (MDR) for specified Unified Payments Interface (UPI) transactions. She emphasized that this charge is neither a tax, cess, nor a surcharge, and the funds collected will not go to the government's Consolidated Fund of India.
Understanding the New UPI MDR Framework
Speaking to PTI, Sitharaman clarified that the MDR is a charge designed to remain within the digital payments ecosystem. It will be distributed among the various entities involved in processing digital transactions, rather than accruing to the government as revenue. Crucially, merchants will be responsible for bearing this charge, ensuring that customers are not separately billed for the MDR.
Effective from October 15, a 0.4% MDR will apply to person-to-merchant (P2M) UPI transactions exceeding Rs 2,000. For transactions amounting to Rs 75,000 or more, the charge will be capped at Rs 300.
How MDR Funds Are Distributed
The money collected through this MDR mechanism is earmarked for distribution among key participants in the UPI ecosystem. According to details shared, 40% will go to the customer's bank, 30% to payment gateways, 20% to the UPI application provider, and 10% to the sponsoring bank of the UPI app.
Who Is Affected and Who Is Exempt?
It's important to note that the new framework does not impose a charge on all UPI transactions. Person-to-person (P2P) payments will continue to be free, regardless of the transaction value. Similarly, P2M payments up to Rs 2,000 will also remain outside the MDR framework.
Moreover, small merchants processing up to Rs 1 lakh per month through UPI QR codes under the P2M category will continue to enjoy zero-MDR treatment. The Finance Ministry estimates that approximately 96% of all UPI merchant transactions will remain unaffected by the new MDR.
Comparison to Card Payments and Special Categories
Sitharaman drew a parallel between the new UPI MDR and the existing MDR structure for debit and credit card payments. She highlighted that merchants and payment providers already manage such charges among themselves for card transactions, a principle that will now extend to UPI MDR.
The framework also includes differentiated rates for specific sectors. Essential services like railways, telecom, fuel, and insurance will attract a flat Rs 5 MDR on transactions above Rs 2,000. Transactions involving mutual funds, securities, brokers, and dealers will incur an MDR of 0.02%, capped at Rs 300.
This structured approach aims to create a sustainable revenue mechanism for the UPI ecosystem participants, fostering further innovation and infrastructure development, while maintaining the accessibility and affordability of digital payments for the majority of users and transactions.