UPI transactions consists of person-to-person (P2P) and person-to-merchant (P2M) payments

A provision in The Taxation and Other Laws (Amendment) Bill 2026, followed by the Reserve Bank of India Governor Sanjay Malhotra’s statement on Wednesday has raised the possibility of the Centre levying merchant discount rate (MDR) on UPI transactions soon.

MDR is a fee charged by banks and payment processing companies on merchants for each credit or debit card transaction made by customers. What can be the optimum rate at which the banks, payment service providers as well as NPCI, the infrastructure provider, can be adequately compensated?

UPI transactions consists of person-to-person (P2P) and person-to-merchant (P2M) payments. The thinking seems to be to target P2M transactions alone. Currently, P2M transactions account for only 29 per cent of the total value of all UPI payments, according to a Finance Ministry release. If we apply a filter, say transactions of more than Rs.2,000 each, then around 67 per cent of all P2M payments will be covered. That would have accounted for Rs.5,80,568 crore in July alone going by the latest available data. The total value of UPI transactions in July was Rs.29.88 lakh crore

Extrapolating July data for the whole year and assuming a small 0.25 per cent MDR on P2M payments of more than Rs.2,000, the MDR yield will be Rs 17,416 crore annually. MDR of 0.50 per cent will give Rs 34,833 crore, 0.75 per cent will give Rs 52,249 crore and 1 per cent will give Rs 69,665 crore.

Currently, the Centre is giving banks and other payment service providers an incentive for providing UPI service. For FY27, Rs 2,000 crore was set aside in the Union Budget for the incentive scheme for promotion of RuPay Debit Cards and low-value BHIM-UPI transactions. The revised estimate for FY26 was Rs 2,196 crore.

NPCI’s financial statements for FY25 show that it spent Rs 742 crore towards capital expenditure. But this spend is not just for UPI but also for other payment systems such as IMPS, Bharat Bill Pay and Fastag. While there will be revenue expenses to account for, NPCI’s net profit margin was 36 per cent in FY25.

According to an RBI discussion paper released in 2022, total cost incurred by banks, app providers and NPCI for each P2M transaction equals 0.25 per cent of the transaction value.

But the analysis above shows that an MDR of less than 0.25 per cent may be enough to compensate all stakeholders adequately at this juncture. Of course, there is reliable data on spending by banks on servicing UPI payments. Yet, the fact is that banks do benefit from higher savings account balances maintained by customers to service their UPI payments.

Published on August 6, 2026