India's record-breaking UPI payments ecosystem could be on the verge of a major policy shift.

After years of offering zero-cost transactions to merchants, the government has taken the first legislative step towards allowing merchant discount rates (MDR) on the country's most widely used digital payments platform.

Finance Minister Nirmala Sitharaman on Tuesday introduced amendments to the Payment and Settlement Systems Act in Parliament, creating the legal framework for levying MDR on digital payments, including UPI.

While the amendment enables such charges, the government has not yet taken a final decision on whether the fees will be introduced, how much they will be, or which transactions will be covered.

The move comes as India's Unified Payments Interface continues to expand at an unprecedented pace.

Official data showed UPI processed 23.6 billion transactions worth Rs 29.9 trillion in July alone, making it one of the world's largest real-time payment systems.

Walmart-owned PhonePe and Alphabet's Google Pay remain the dominant players on the network.

For years, payment companies have argued that the absence of MDR on UPI transactions has made it increasingly difficult to sustain investments in the digital payments ecosystem.

Unlike credit and debit card payments, where merchants pay processing fees, UPI transactions currently do not attract any merchant charge.

According to industry and regulatory sources, the proposed amendment merely provides the legal basis for introducing MDR in the future. No final decision has been taken on the rate of the fee or its scope.

Policymakers are currently examining two broad approaches. One option is to levy MDR only on transactions above a specified value, while another proposes linking the fee to a merchant's annual turnover.

One proposal under consideration would impose an MDR of 0.3 per cent to 0.5 per cent on UPI transactions exceeding Rs 2,000, but only for merchants with an annual turnover of more than Rs 1.5 crore.

Consumers and small businesses are expected to remain outside the ambit of any such charges if this proposal is adopted.

A report by Jefferies noted that although transactions above Rs 2,000 account for only around 4 per cent of merchant payment volumes, they contribute nearly 67 per cent of the total transaction value.

This suggests the proposed framework could target high-value commercial payments while preserving the zero-fee experience for the vast majority of everyday UPI users.