A parliamentary committee has recommended reintroducing a graded Merchant Discount Rate (MDR) on UPI transactions to create a sustainable revenue model, arguing that current government subsidies are insufficient. It highlights a significant funding gap, noting that state incentives cover only a small fraction of industry costs and potential MDR revenue, which threatens long-term investment in the digital payments infrastructure.
The committee projects massive growth for UPI, anticipating 600 million new users and a potential scale of 150 billion transactions monthly. However, it warns that adoption is uneven, concentrated in urban areas, and that a slowing growth rate could delay nationwide digital payment goals.
To boost adoption in smaller cities, the committee also advocates for continued cashback and subsidy schemes. The industry body has similarly pushed for MDR's return to ensure the ecosystem's financial viability without perpetual government support.
Main Topics: UPI sustainability, Merchant Discount Rate (MDR), government subsidies for digital payments, adoption growth projections and challenges, regional adoption disparities.
The Standing Parliamentary Committee on Finance has recommended bringing back graded merchant discount rate (MDR) on Unified Payments Interface, echoing a long-standing demand of the payments industry to allow direct revenue generation on UPI payments.
âThe committee would like to emphasise that establishing a viable revenue mechanism is critical to ensuring the UPI ecosystem achieves financial sustainability without perpetually straining the government exchequer,â the committee for 2026-27 said in its report published on March 12.
The committee also recognised the need for cashback and multi-year subsidy schemes to promote adoption of digital payments in tier-three to -six cities.
The Payments Council of India, the industry body for payment companies, has through multiple representations requested the government to consider bringing back MDRâa fee paid by merchants to banks for processing digital transactions.
In this yearâs federal budget, the government set aside Rs 2,000 crore for the banking industry to compensate for the loss incurred for providing UPI and RuPay debit cards free of cost.
The committee said it expects 600 million new users to join the UPI ecosystem, effectively bringing around a billion users into the fold of digital payments. It projected UPI to scale to 150 billion transactions per month at its peak over the next five to seven years. Currently, the payment system records 20 billion transactions on average per month.
However, the committee noted that with the overall growth rate slowing down to 25% in FY26 from 42% in FY25, the adoption of the payment mode across the country is set to take longer, effectively impacting the governmentâs digital payments agenda.
âThe current government incentive covers merely 11% of the industryâs actual costs and 14% of potential MDR collections, creating a structural funding gap impacting long-term infrastructural investment,â the report said.
Looking at the incentive scheme that is currently being run by the government, the committee noted that UPI is growing only in large urban pockets, with many smaller towns still not showing adoption.
In 2024-25, the UPI ecosystem recorded 185 billion transactions, or 91% of the 203 billion initial target for the fiscal year. In the current financial year, as of December, around 77% of the 230 billion transaction target had been achieved.
âThe committee would like to emphasise that establishing a viable revenue mechanism is critical to ensuring the UPI ecosystem achieves financial sustainability without perpetually straining the government exchequer,â the committee for 2026-27 said in its report published on March 12.
The committee also recognised the need for cashback and multi-year subsidy schemes to promote adoption of digital payments in tier-three to -six cities.
The Payments Council of India, the industry body for payment companies, has through multiple representations requested the government to consider bringing back MDRâa fee paid by merchants to banks for processing digital transactions.
In this yearâs federal budget, the government set aside Rs 2,000 crore for the banking industry to compensate for the loss incurred for providing UPI and RuPay debit cards free of cost.
The committee said it expects 600 million new users to join the UPI ecosystem, effectively bringing around a billion users into the fold of digital payments. It projected UPI to scale to 150 billion transactions per month at its peak over the next five to seven years. Currently, the payment system records 20 billion transactions on average per month.
However, the committee noted that with the overall growth rate slowing down to 25% in FY26 from 42% in FY25, the adoption of the payment mode across the country is set to take longer, effectively impacting the governmentâs digital payments agenda.
âThe current government incentive covers merely 11% of the industryâs actual costs and 14% of potential MDR collections, creating a structural funding gap impacting long-term infrastructural investment,â the report said.
Looking at the incentive scheme that is currently being run by the government, the committee noted that UPI is growing only in large urban pockets, with many smaller towns still not showing adoption.
In 2024-25, the UPI ecosystem recorded 185 billion transactions, or 91% of the 203 billion initial target for the fiscal year. In the current financial year, as of December, around 77% of the 230 billion transaction target had been achieved.
Meridiano
