The New UPI MDR Framework: Balancing Sustainability and Consumer Protection

Source: PIB  

Introduction 

The Unified Payments Interface (UPI), developed by the National Payments Corporation of India (NPCI), has transformed digital payments in India through instant, secure money transfers. A new charge structure — the Merchant Discount Rate (MDR) framework — has now been introduced under the Payment and Settlement Systems Act, 2007, following deliberations by the UPI Steering Committee. The framework has been designed to ensure the long-term sustainability of UPI while keeping payments free for individuals and protecting small merchants from additional charges. 

What is UPI? 

• Unified Payments Interface (UPI) is a real-time digital payment system that allows users to send and receive money instantly.  
• It links multiple bank accounts to a single mobile application, enabling peer-to-peer (P2P) transactions, bill payments, and merchant payments (P2M).  
• UPI allows users to transact through a Virtual Payment Address (VPA) instead of sharing bank account numbers and also supports online shopping and government service payments through a mobile phone and internet connection. 
• Its simplicity, real-time settlement, and cost-effectiveness have driven its widespread adoption across India. 

What Remains Free Under the New Framework? 

• All person-to-person (P2P) UPI transactions remain completely free, irrespective of the amount transferred, with no transaction fee, platform fee, or other charge imposed on individuals. P2P transactions account for approximately 70% of total transaction value and remain entirely outside the MDR framework. 
• All person-to-merchant (P2M) transactions up to ₹2,000 remain free of MDR, with no charge to the customer. Small merchants, including street vendors, receiving up to ₹1 lakh per month through UPI QR codes under the Person-to-Person-Merchant (P2PM) category, continue to enjoy zero MDR on all such transactions. 
• Taken together, approximately 96% of all merchant transactions remain unaffected by the new framework. 

What will Attract MDR? 

• A nominal MDR of 0.4% will apply only to P2M transactions above ₹2,000, capped at ₹300 per transaction for amounts of ₹75,000 and above. 
• Transactions above ₹2,000 in essential and thin-margin sectors — railways, telecommunications, insurance, fuel, and agricultural inputs — will attract a flat MDR of ₹5 per transaction, providing cost certainty for critical public services and narrow-margin businesses. 
• Payments relating to mutual funds, securities, stockbrokers, and dealers will attract an MDR of 0.02%, capped at ₹300 per transaction, to support continued retail participation in formal financial markets. 

Why was the MDR Framework Introduced? 

• MDR is neither a tax nor a charge collected by the Government or NPCI — it is distributed among payment ecosystem participants, including banks and payment application providers, to support the operation and continued expansion of the UPI ecosystem.  
• Banks have been directed to ensure merchants do not pass MDR charges on to customers, and UPI application providers are expressly prohibited from imposing platform fees or hidden charges. 
• A dedicated fund, financed by 5% of total MDR collections, will be established to promote UPI adoption among small merchants and support their inclusion in India's digital payments ecosystem.  
• The framework is consistent with the recommendations of the Standing Committee on Finance in its 32nd Report, which emphasised the importance of ensuring viable revenue for the UPI ecosystem. 

What is the Legal Framework Governing UPI Transactions? 

• Regulatory Statutes: 
•  UPI is governed by the Payment and Settlement Systems Act, 2007, which authorises the RBI to regulate and supervise payment systems in the public interest; the Information Technology Act, 2000, which provides the legal framework for electronic transactions and cybersecurity; and the Reserve Bank of India Act, 1934, which underpins the RBI's oversight of digital payment platforms.
• Liability and Accountability: 
• Banks facilitating UPI must comply with RBI and NPCI regulations to ensure secure systems, while Payment Service Providers (PSPs) such as Google Pay, PhonePe, and Paytm must maintain a secure transaction environment in compliance with regulatory standards.
• Consumer Protection: 
•  The Consumer Protection Act, 2019 affords consumers the right to be informed of UPI terms and conditions and the right to seek redress for disputes. The RBI Ombudsman Scheme and digital consumer forums provide mechanisms for resolving complaints regarding failed transactions, unauthorized debits, and refund delays.
• Fraud and Legal Recourse: 
•  Common frauds include phishing, SIM swap fraud, and fake UPI apps. Section 66C of the IT Act penalises identity theft, while cheating and dishonesty are addressed under criminal law provisions. Victims may approach the Cyber Crime Cell or seek resolution under the RBI's Digital Payment Fraud Scheme.
• Taxation: 
• GST applies to certain UPI-facilitated merchant transactions, and Income Tax obligations apply where UPI transactions involve business income.

Conclusion 

The new UPI MDR framework strikes a balance between the continued sustainability of India's digital payments ecosystem and the protection of individuals and small businesses. By keeping P2P transactions, small-value merchant payments, and small-merchant transactions entirely free, the framework ensures that roughly 96% of merchant transactions and all individual transfers remain unaffected, while introducing a limited, transparent charge on larger merchant transactions. This economic framework operates alongside a robust legal architecture — spanning the Payment and Settlement Systems Act, 2007, the IT Act, 2000, and the Consumer Protection Act, 2019 — that continues to safeguard the interests of consumers, merchants, and the broader digital payments ecosystem as UPI evolves further.