UPI SUBSIDY FRAMEWORK ENTERS NEXT PHASE AS MDR REVENUE MODEL TAKES SHAPE
The Centre is preparing to review the government’s subsidy support for Unified Payments Interface (UPI) transactions as the new Merchant Discount Rate (MDR) framework takes effect from October 15, 2026. According to Finance Ministry sources, the government and the Indian Banks’ Association (IBA) will discuss the quantum and structure of continued support, recognising that MDR collections may not fully cover the operating cost of the UPI ecosystem.
The government has allocated ₹2,000 crore for FY2026-27 under the incentive scheme supporting RuPay debit cards and low-value BHIM-UPI transactions. The existing support mechanism is designed to compensate participating banks and ecosystem players for maintaining low-value digital payments without imposing charges on users or eligible small merchants.
Under the new framework, MDR will apply to specified person-to-merchant transactions above ₹2,000, while person-to-person UPI payments will remain free. The Finance Ministry has stated that approximately 96% of merchant transactions will remain unaffected, with small merchants and transactions within the zero-MDR framework continuing to receive protection.
The emerging policy approach indicates a shift towards a more sustainable financing structure for India’s digital payments infrastructure. Rather than relying entirely on budgetary support, MDR revenue will contribute to the broader payment ecosystem, including banks and payment application providers. At the same time, the Centre is coordinating with banks and merchant bodies to ensure MDR is not passed on to consumers.
The policy challenge will be to balance financial sustainability, merchant affordability and continued digital-payment adoption. The government’s discussions with banks will determine how subsidy support evolves alongside the new revenue model.
