Payment operators are poised to ask the government for an increase in UPI subsidy for low-value payments, in order to sustain the zero-MDR regime, according to a report from The Economic Times.
Payment aggregators believe the current allocation is far below what is required to keep the UPI's zero-cost model financially stable.
For 2025-26, the central government allocated Rs 427 crore for digital payment incentives. This is well below the Rs 2,000 crore allocation that was made in the previous year.
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To put things into perspective, India's digital payments ecosystem collectively spends Rs 5,000-6,000 crore every year to subsidise UPI's person-to-merchant transactions that are valued below Rs 2,000.
"We need upwards of Rs 6,000 crore to support low-value UPI transactions, far higher than the Rs 427 crore currently budgeted,” said a senior executive at a major payment operator.
What is MDR?
MDR or merchant discount rate, is the fee merchants pay to banks or payment operators to facilitate a transaction.
The government has enforced a zero MDR structure for UPI since 2020, thus forcing payment companies and banks to absorb the transaction costs, which stands at roughly Rs 2 per low-value transaction, as per the report.
Meanwhile, industry representatives will also seek approval to levy a 25–30 basis point MDR on small-ticket payments made at large merchants, who have an annual turnover above Rs 10 crore.
The industry argues that high-volume, high-turnover entities can absorb a nominal fee, thus creating a more sustainable economic framework for UPI.
This comes amid government's fluctuation support for UPI payments. While incentives for digital payments stood at Rs 1,500 crore in 2021-22 and even Rs 3,500 crore in 2023/24, it has fallen to Rs 427 crore in the latest year.
Despite the funding cuts, however, UPI continues to dominate India's payment ecosystem, account for about 85% of transactions by volume. Last month, UPI set a record of 20.7 billion transactions, worth Rs 27.28 lakh crore.
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