Government may do away with UPI subsidies as MDR revenue kicks in
Mumbai: The government could discontinue subsidies for low-value Unified Payments Interface transactions following the introduction of merchant discount rate (MDR) on larger UPI payments, as banks and payment companies begin earning transaction-linked revenue from the network, people familiar with the matter said.
The Centre has budgeted ₹2,000 crore for incentives on UPI and RuPay transactions in FY27, but no fresh subsidy has been paid for transactions undertaken since April 2025, the people said.
“The idea behind introducing MDR on larger-value UPI payments was to move the ecosystem away from taxpayer-funded subsidies,” said a senior banking official. “No fresh subsidy has been paid for transactions undertaken over the past year-and-a-half, and the government did not want taxpayers to continue subsidising payments made to large merchants.”
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The government’s UPI incentive disbursements had fallen sharply to ₹1,046 crore in FY25 from ₹3,631 crore in FY24.
The government began compensating banks and payment companies after MDR on UPI and RuPay debit-card transactions was made zero from January 2020 to accelerate digital-payment adoption.
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The incentive scheme was subsequently designed to partly offset the adverse impact of zero MDR, encourage small merchants to accept digital payments and support investment in secure payment infrastructure, particularly in smaller cities and rural areas.
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