Government Reduces RuPay and Low-Value UPI Transaction Incentives in Budget 2025

In the upcoming fiscal year, the government has allocated INR 437 crore instead of the INR 2000 crore it had set aside the previous year to promote RuPay debit cards and low-value UPI transactions (up to INR 2,000). The central government has made low-value UPI and RuPay debit card payments free in an effort to promote digital payments. Nonetheless, a MDR or merchant discount rate of more than 1% is still applied to transactions over INR 2,000.

Since processing such transactions costs money, the program was launched in 2023 to encourage banks, other payment system operators, and app developers to do so. Processing a UPI P2M (Peer-to-Merchant) transaction usually costs stakeholders (payer's bank, beneficiary's bank, UPI app provider, and NPCI) close to 0.25% of the transaction value. The stakeholders must receive reimbursement through these incentives since they are unable to recoup the expenditures due to zero MDR.

In order to conduct digital transactions, retailers must pay banks or payment service providers a fee known as MDR. UPI incentives are a crucial source of income for smaller players to maintain themselves because the government removed MDR costs on UPI in 2019 in an effort to encourage digital payments.

System’s Expansion Makes Government to Lower Incentives

The government has been decreasing the incentives for the same as the system expands, following an initial increase of INR 2,484 crore. The initial allocation of INR 1,441 crore was eventually increased to INR 2,000 crore last year. Given that the updated figure was higher, the government might think about providing additional funding during the course that exceeds INR 437 crore. Many have encouraged the government to reconsider the zero MDR rule in light of UPI's current mainstreaming. The total value of UPI transactions in December 2024 was INR 23.24 lakh crore, compared to INR 707.93 crore in December 2016 and INR 4.16 lakh crore in December 2020.

UPI was used for 16,730.01 million transactions as of December 2024, up from 2,234.16 million in December 2020. In seven countries—the United Arab Emirates, Singapore, Bhutan, Nepal, Sri Lanka, France, and Mauritius—the payment method is now operational.

The Goal is to Promote More Balanced Economy

The goal of this action was to promote a more balanced environment and avoid market dominance. At first, December 31, 2024, was the deadline for compliance. However, the NPCI extended this deadline by two years, mandating adherence by December 31, 2026, in recognition of the possible disruption to the quickly expanding digital payments sector.

Major players that now control sizable market shares, such as PhonePe and Google Pay, will have more time to broaden the UPI market thanks to this extension.

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