India’s proposed Merchant Discount Rate (MDR) framework for Unified Payments Interface (UPI) transactions could indirectly increase costs for consumers despite restrictions preventing merchants from directly passing on payment charges, according to a technical report by professors at IIT Bombay.
The report warns that businesses may adjust the prices of their products and services to absorb the additional expenses associated with digital payments. As a result, even consumers making UPI transactions below ₹2,000, which remain free under the proposed framework, could indirectly bear part of the financial burden.
The report estimates that the proposed MDR framework could generate approximately ₹18,000 crore annually for payment service providers. However, it argues that the framework requires revision before implementation to prevent additional costs from undermining public confidence in India’s widely used digital payments system.
UPI MDR Framework Could Generate ₹18,000 Crore Annually
Under the proposed framework, merchant payments above ₹2,000 may attract an MDR of up to 0.40%, subject to a maximum charge of ₹300 per transaction. Person-to-person transfers and merchant payments of ₹2,000 or less would continue to remain free.
Certain transactions in essential sectors would attract a flat fee of ₹5, while capital market transactions would carry a charge of 0.02%, capped at ₹300.
The IIT Bombay report estimates that merchant UPI transactions amounted to nearly ₹9 lakh crore in August 2026. Of this amount, approximately ₹6 lakh crore involved payments exceeding ₹2,000.
Assuming an effective average MDR of 0.25%, the report projects that the framework could generate monthly revenue of around ₹1,500 crore.
While the proposed charges could provide a revenue stream for payment service providers, the report raises concerns about their broader economic impact and the possibility that businesses could transfer the costs indirectly to customers.
Consumers Could Pay More Through Higher Retail Prices
One of the report’s primary concerns is that prohibiting direct surcharges may not prevent consumers from ultimately bearing the cost of digital payments.
Businesses typically consider operating expenses when determining the selling prices of goods and services. If MDR increases their payment processing costs, merchants may incorporate these expenses into their general pricing structures rather than imposing separate charges on customers using UPI.
This could affect customers regardless of their preferred payment method, including those using cash, debit cards or smaller UPI transactions.
The report cautions that such an outcome could undermine the affordability and accessibility that have helped UPI become a widely adopted digital payments platform.
It also warns that introducing charges without adequately addressing their impact on consumers could weaken public trust in the system.
Credit Card Fees May Already Create an Indirect Burden
The report also highlights what it describes as an existing cost burden associated with credit card merchant fees.
According to its estimates, the cost of merchant fees on credit card transactions indirectly borne by users of UPI, debit cards and cash could have reached ₹26,000 crore in FY26.
The report argues that merchants frequently maintain common prices across different payment methods. Consequently, customers who do not use credit cards may indirectly contribute to the costs associated with credit card rewards and other benefits.
This pricing structure could mean that customers using lower-cost payment methods also bear part of the expense generated by credit card transactions.
The report questions whether introducing additional charges on digital payments is necessary without first addressing these existing pricing and cost-allocation concerns.
IIT Bombay Report Suggests Banks Should Help Fund UPI
Instead of relying primarily on transaction charges, the report proposes that banks contribute towards maintaining the UPI infrastructure.
It estimates that banks earned a net interest margin of ₹4.84 lakh crore from current and savings account deposits in FY26. Based on this figure, the report suggests that a contribution of approximately 3% of this income, or around ₹15,000 crore annually, could help support UPI’s operating requirements.
The report also questions the contrast between potentially charging for digital transactions and maintaining free ATM withdrawals, despite the substantial expenses associated with currency management.
According to the report’s argument, the funding structure for digital payments should be reconsidered to ensure that the cost of maintaining the infrastructure does not disproportionately affect consumers.
Recommendations to Make the MDR Framework More Targeted
The IIT Bombay report proposes several changes to the proposed framework to reduce the risk of additional costs for consumers and smaller businesses.
Its recommendations include exempting debt collection and loan repayment transactions from MDR, particularly to avoid increasing digital repayment costs for microfinance borrowers.
It also suggests restricting charges to online merchants and businesses with annual turnover exceeding ₹50 crore. Additionally, the report recommends capping percentage-based MDR at ₹40 per transaction and directing the revenue towards expanding and securing the UPI infrastructure.
These proposals aim to create a more targeted fee structure while protecting the affordability of digital payments.
Balancing Payment Infrastructure Costs With Consumer Interests
The debate surrounding UPI MDR highlights the challenge of financing India’s digital payments infrastructure while preserving the low-cost experience that has encouraged widespread adoption.
Payment service providers require sustainable funding to maintain transaction systems, improve security and support future expansion. However, the report argues that the funding mechanism should avoid creating indirect costs for consumers who rely on free digital payment options.
A revised framework that considers merchant size, transaction purpose and the distribution of payment costs could help address these concerns.
The report concludes that a more carefully designed MDR policy could support the next phase of UPI’s growth while keeping consumers at the centre of India’s digital payments ecosystem.
