Govt rules out rethink on 0.4% UPI merchant fee

The government on Wednesday said there would be no rethink on the 0.4% merchant discount rate (MDR) on person-to-merchant UPI transactions, amid demands for its withdrawal. A senior official said the fee was introduced in the interest of the UPI ecosystem and to make it self-sustainable. Communications minister Jyotiraditya Scindia said merchants cannot pass the charge to customers. Govt says only 4% of transactions will be affected. Petroleum dealers threatened to stop accepting digital payments above Rs 2,000 without exemption.

Written by AI from Times of India — Top · not yet reviewed by an editor · Published 17 Sept 2026, 5:07 am IST

Source

Times of India — Top · read the original report ↗

#upi#mdr#digital payments#merchants#government

Desk check · compared with the source

What the desk checked (5)

There will be no rethink on the 0.4% MDR on person-to-merchant UPI transactions. — Attributed to an unnamed senior government official quoted in the source.
Merchants cannot pass the charge on to customers; doing so would be outside the legal framework. — Attributed by name to Communications Minister Jyotiraditya Scindia.
Only 4% of transactions will be impacted and person-to-person transfers face no charge. — Attributed to the government; PhonePe CEO Sameer Nigam's 96% figure in the source is consistent with it.
Digital payments make up 50-60% of petroleum dealers' daily sales, with 10-15% being UPI payments above Rs 2,000. — Figure appears in source without a named attribution.
Petroleum dealers threatened to stop accepting digital payments above Rs 2,000 if not exempted. — Attributed to dealers, with a quote from FAIPA spokesperson Monty Sehgal on thin margins.

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Analysts’ view opinion

AI Economic Analyst

UPI's free ride is ending: the government's position is that a system built on subsidised rails must now pay for itself, and the merchant is the one being asked to pick up the tab. Customers are shielded, but that shielding means the entire 0.4% lands on seller margins — which is why petroleum dealers, MSME retailers and brokers are pushing back hardest. Even if only 4% of transactions are affected, as the government says, those tend to be the higher-value ones, so the rupee impact can feel bigger than the percentage suggests.

Barring merchants from passing the fee on closes the usual escape valve, so the cost sits squarely on trader profit rather than being shared with users.
The petroleum case is the sharpest: digital is 50-60% of daily sales with 10-15% of that in UPI payments above Rs 2,000, and dealers say margins have not been revised since 2017, so the hit is straight off the bottom line.
Retailers warn the incentive now runs the wrong way — nudging small merchants back toward cash, which would work against digitisation, transparency and tax visibility.
Zerodha's point that money transferred to a broker may never turn into a revenue-generating trade shows the burden is not spread evenly across business models.
The counter-argument is real too: running a secure, high-volume payments network costs money, and the view from parts of government and industry is that it should be self-sustaining rather than subsidised — with a payments-industry claim that 96% of transactions stay MDR-free.

What to watch — Watch whether petroleum dealers or other thin-margin sectors win exemptions after rollout next month, whether the threatened refusal of UPI payments above Rs 2,000 actually happens, and whether cash usage ticks up.

The story does not establish how much revenue MDR will generate or for whom, the actual measurable hit to merchant margins, or whether any exemptions are under consideration — and no effect on prices or cash usage has yet been demonstrated.

Deep dive

Research brief · 8 facts · 4 dates · exam-ready

The brief

Context

The government has introduced a 0.4% merchant discount rate (MDR) on person-to-merchant UPI transactions, a framework due to take effect next month. MDR is a fee a merchant pays on accepting a digital payment; UPI person-to-merchant payments had so far been largely free of such charges. Small retailers, petroleum dealers and stock brokers want an exemption, arguing thin margins, while the government says the fee is needed to make the UPI ecosystem self-sustainable and safer. On Wednesday, the government ruled out any rethink.

Key facts

Government said there will be no rethink on the 0.4% MDR on person-to-merchant UPI transactions.
A senior official said the decision was taken when the UPI system was introduced in 2020 and the new framework will make it self-sustainable.
Government insists only 4% of transactions will be impacted; person-to-person transfers will face no charge.
Communications minister Jyotiraditya Scindia said no merchant can pass the charge to a customer, and doing so would be outside the legal framework.
Petroleum dealers threatened to stop accepting digital payments above Rs 2,000 if not exempted from the framework, which kicks in next month.
Digital payments make up 50-60% of petroleum dealers' daily sales, of which 10-15% are UPI payments above Rs 2,000.
Federation of All India Petroleum Association spokesperson Monty Sehgal said petrol dealer margins have not been revised in line with inflation since 2017.
PhonePe CEO Sameer Nigam said 96% of transactions will bear no MDR, customers will have 100% of payments free and merchants 96%.

Timeline

2020Decision on MDR was taken when the UPI system was introduced, according to a senior government official.
2017Last revision of petrol dealers' margins in line with inflation, as claimed by petroleum dealers.
Wednesday (as reported)Government rules out any rethink on the 0.4% MDR; minister Scindia says merchants cannot pass the charge to customers.
Next monthThe proposed MDR framework is due to kick in.

Who has a stake

Government / Communications minister Jyotiraditya Scindia — Defends MDR as needed for UPI ecosystem safety, security and self-sustainability; bars merchants from passing the charge to customers.
Small and MSME retailers (Retailers Association of India) — Fear squeezed margins in the festive season and say the burden creates an incentive to steer transactions back to cash.
Petroleum dealers (Federation of All India Petroleum Association, United Petroleum Dealers Association) — Wafer-thin margins unrevised since 2017; threaten to stop accepting digital payments above Rs 2,000 without exemption.
Stock brokers (Zerodha's Nithin Kamath) — Money transferred to a broker may not result in a trade, so brokers could bear unlimited UPI cost without revenue.
Payment platforms (PhonePe CEO Sameer Nigam) — Argue impact is limited: 96% of transactions bear no MDR and customers pay nothing.
Customers — Government says they will not be charged; person-to-person transfers remain free.
NITI Aayog (vice-chairperson Ashok Kumar Lahiri) — Argues businesses must become self-sustaining rather than depend on government subsidies.

Why it matters

UPI is India's mass digital payments backbone, and pricing it changes the incentives of millions of merchants who adopted it because it was free. Traders warn the 0.4% MDR could push small, thin-margin businesses back to cash, undercutting the formalisation gains of digital payments; the government counters that the fee is limited in scope and necessary for a self-sustaining, secure system.

UPSC angle

Prelims pointers

MDR (merchant discount rate) is the fee a merchant pays on accepting a digital payment; here set at 0.4% on person-to-merchant UPI transactions.
Government says person-to-person UPI transfers attract no MDR; only about 4% of transactions are impacted.
Merchants are barred from passing the MDR on to customers; doing so is outside the legal framework, per minister Jyotiraditya Scindia.
Jyotiraditya Scindia is the Communications minister; Ashok Kumar Lahiri is NITI Aayog vice-chairperson (as stated in the source).
Petroleum dealers' threat pertains to digital payments above Rs 2,000; UPI above Rs 2,000 is 10-15% of their sales.
The MDR framework is due to take effect next month; the underlying decision dates to 2020 when UPI system was introduced, per a senior official.

Mains framing

The 0.4% MDR on person-to-merchant UPI payments marks a shift from a subsidised, zero-cost digital payments regime to a user-pays model, justified by the government on grounds of ecosystem safety, security and self-sustainability, and echoed by NITI Aayog's view that businesses should not depend on subsidies. The friction lies in incidence: since merchants cannot legally pass the charge to customers, the cost lands on sellers with thin margins — petroleum dealers whose margins have not been inflation-adjusted since 2017 and for whom digital payments are 50-60% of daily sales, MSME retailers facing festive-season pressure, and brokers who receive funds that may never generate a trade. Payment platforms counter that 96% of transactions bear no MDR, so the aggregate burden is small. The core policy risk flagged by industry is behavioural: an incentive to steer transactions back to cash, eroding formalisation and traceability. A way forward consistent with the story's positions would involve calibrating or exempting sectors with regulated, wafer-thin margins and high-value ticket sizes, clarifying treatment of non-revenue transfers such as broking funds, and pairing any fee with transparent disclosure of how MDR revenue strengthens UPI's safety and security.

Key terms

MDR (Merchant Discount Rate): Fee borne by a merchant for accepting a digital payment; set at 0.4% for person-to-merchant UPI transactions under the new framework.
Person-to-merchant (P2M) UPI transaction: A UPI payment made by a customer to a business, as distinct from person-to-person transfers which attract no charge.
UPI ecosystem: The digital payments network the government says the MDR will make self-sustainable and more secure.
Federation of All India Petroleum Association: Petroleum dealers' body whose spokesperson Monty Sehgal cited wafer-thin margins unrevised since 2017.
Retailers Association of India: Industry body warning that MDR burden gives MSME retailers an incentive to steer transactions back to cash.
NITI Aayog: Government think tank; its vice-chairperson Ashok Kumar Lahiri said businesses must become self-sustaining rather than rely on subsidies.

Practice questions

Examine the implications of levying a 0.4% merchant discount rate on person-to-merchant UPI transactions for India's digital payments adoption, particularly among MSME retailers.
"A self-sustaining payments infrastructure cannot rest on permanent subsidy." Critically evaluate this argument in the light of demands for MDR exemptions from petroleum dealers and brokers.
If merchants are legally barred from passing MDR to customers, who ultimately bears the cost of digital payments? Discuss with reference to sectors with regulated or thin margins.

Grounded only in the source report — figures and dates are the source's, not inferred.

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