RAI Raises Concerns Over New UPI MDR, Warns of Cash Economy Risk
The Retailers Association of India (RAI) has raised concerns over the revised Merchant Discount Rate (MDR) framework for UPI payments, warning that charges on certain merchant transactions could create additional pressure for small retailers and potentially encourage a shift towards cash.
Under the revised framework, a 0.4% MDR will apply to specified person-to-merchant (P2M) UPI transactions above ₹2,000, with the charge capped at ₹300 for transactions of ₹75,000 and above. The framework is scheduled to take effect from October 15, 2026. Person-to-person UPI transactions will remain free, while payments to merchants up to ₹2,000 and transactions covered under the zero-MDR framework for small merchants will also remain free.
Although the MDR is charged within the merchant payment ecosystem rather than directly to consumers, RAI believes the additional cost could affect retailers operating on narrow margins. The association has particularly highlighted the timing of the change as the festive shopping season approaches.
“Small merchants will now think twice about whether to accept cash or UPI,” said Kumar Rajagopalan, CEO, Retailers Association of India. “During the festive season, a large share of transactions crosses the Rs 2,000 mark, and the moment a fee attaches itself to digital payment, cash becomes the path of least resistance.”
Concerns Around Digital Formalisation
RAI’s concerns extend beyond the direct impact of payment costs on retailers. The association argues that if some merchants encourage customers to use cash instead of digital payments, transactions could move away from the formal digital trail associated with GST reporting and business records.
“This cuts against the government’s own formalisation agenda,” Kumar Rajagopalan said. “UPI acceptance should be incentivised, not taxed.”
The association has also called for greater differentiation between different types of UPI transactions. According to RAI, most UPI payments are linked directly to savings or current accounts and therefore differ from credit-based transactions in terms of interchange costs and credit risk.
“We don’t see the case for charging a bank-to-bank UPI payment the way you’d charge for credit,” Rajagopalan said. “Where UPI is linked to a credit line, a fee is easier to defend, because the cost structure genuinely resembles a credit product. We urge that the government should bear the cost of normal UPI transactions since it repays the government with GST and traceable transactions instead of cash transactions.”
RAI Calls for Government Support
RAI has also raised questions over how the costs associated with maintaining the UPI infrastructure should be funded.
“NPCI keeps UPI running for the entire country — RBI or the government should be underwriting that cost, not merchants,” Rajagopalan said. “The state gets a formal, traceable transaction it can tax out of every UPI payment. It should be paying for the enablement, not passing the bill down to the smallest retailer in the chain.”
The government, however, has stated that MDR is not a tax or a charge collected by the government or NPCI. Instead, it is distributed among participants in the payments ecosystem, including banks and payment application providers, to support the operation and expansion of UPI. The government has also said the framework is intended to support the long-term sustainability of UPI while protecting individuals and small merchants from additional charges.
RAI said it plans to take up the matter with the National Payments Corporation of India (NPCI) and the Ministry of Finance. The association is seeking a graded approach that distinguishes between debit-linked and credit-linked UPI transactions, alongside incentives designed to encourage small retailers to continue participating in the formal digital payment ecosystem.
The debate comes as UPI continues to account for a significant share of India’s digital payments. According to Reuters, UPI processed 24.5 billion transactions worth ₹29.823 trillion in August 2026, highlighting the scale of the payment network and the significance of changes to its pricing framework.
