UPI MDR: ‘Not a single penny’ will go to govt; earnings to be shared among banks and other entities, says report

The proposed 0.4 per cent merchant discount rate (MDR) on UPI payments above ₹2,000 will not result in any additional cost for consumers, news agency PTI reported, citing government sources. The new MDR is scheduled to come into effect from October 15 and will apply only to merchants accepting UPI payments exceeding ₹2,000.

Person-to-person UPI transfers will remain free, irrespective of the transaction value. Responding to criticism from Opposition parties, including the Congress, which have described the move as a tax on consumers, government sources said that not a "single penny" of the money collected through MDR would be transferred to the government.

Instead, the revenue generated from the fee will be distributed among banks and other participants involved in processing UPI payments, the sources said.

Quick answers to key questions

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QUESTIONS

The UPI MDR is proposed to be 0.4% on person-to-merchant UPI transactions exceeding ₹2,000, capped at ₹300 for transactions above ₹75,000.

The revenue from the UPI MDR will be distributed among banks and participants involved in processing UPI payments: 40% to customers' banks, 30% to payment gateways, 20% to UPI apps, and 10% to sponsoring banks.

No, consumers will not bear the cost of the UPI MDR; it is intended to be paid by merchants, and person-to-person UPI transfers will remain free.

The UPI MDR was introduced to create a sustainable revenue model for the digital payments ecosystem, covering costs related to infrastructure, cybersecurity, and customer support.

UPI transactions below ₹2,000, person-to-person transactions, and transactions by small merchants earning up to ₹1 lakh a month will remain exempt from the new MDR charges.

Under the proposed revenue-sharing arrangement, customers' banks will receive 40 per cent of the MDR collected. Payment gateways will get 30 per cent, while 20 per cent will be allocated to the UPI app and the remaining 10 per cent to the bank sponsoring the UPI app.

"MDR levy of 0.4 per cent on UPI transactions above ₹2,000 will not be passed on to the consumers. Banks, as well as the Indian Banks' Association, will address misconceptions related to MDR charges and their impact on users," the sources said.

MDR is not a tax, government says

They also clarified that the MDR should not be viewed as a tax, cess or surcharge.

Government sources further rejected concerns that the introduction of the merchant fee could encourage consumers to return to cash payments. They said such fears were misplaced.

The sources also expressed hope that the GST Council would consider reducing or reviewing the 18 per cent GST applicable to merchant fees on UPI transactions above ₹2,000, citing the decision taken in the case of insurance premiums as an example.

The Indian Banks' Association (IBA) is expected to launch an awareness campaign to address what it described as misconceptions and rumours surrounding the proposed 0.4 per cent MDR.

The proposed fee is intended to establish a more sustainable revenue model for the digital payments ecosystem. MDR refers to the charge paid by merchants to payment service providers for processing digital payments.

From October 15, a 0.4 per cent MDR will apply to person-to-merchant UPI payments above ₹2,000. The charge will be paid by merchants, not consumers, and will be capped at ₹300 for transactions of ₹75,000 or more. Payments between individuals, as well as the vast majority of everyday merchant payments, will remain free.

Essential services, such as railways, telecom, fuel and insurance, will attract a flat ₹5 fee per transaction above ₹2,000. Capital markets transactions (mutual funds, stockbroking) get a lower 0.02 per cent rate, also capped at ₹300.

Small merchants collecting up to ₹1 lakh a month via UPI QR codes remain fully exempt from any new charge and shield about 96 per cent of all merchant transactions.

The NPCI, which operates the UPI platform, on September 15, issued a circular providing for MDR on certain UPI transactions, with the move aimed at creating a sustainable revenue framework for the digital payments ecosystem.

A dedicated fund for promoting the use of UPI by small merchants will be set up, with a contribution of 5 per cent of total MDR collections. This initiative will expand UPI acceptance, encourage sustained usage, and accelerate the inclusion of small businesses in India's digital payments ecosystem.

(With inputs from PTI)

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