DFS Considers Phased Withdrawal of UPI Support Through Tiered Incentives

The Department of Financial Services (DFS) is examining ways to gradually reduce government support for UPI over the next few years, as per The Moneycontrol news report.  

The issue has come up as the cost of UPI transactions has risen above the amount provided under the current incentive scheme. 

Two Options Under Review 

In a response to the Standing Committee on Finance, DFS said it was considering two options. One is to bring back merchant discount rate (MDR) for selected high-value transactions or merchants. The other is a tiered incentive system that would reduce government support over time. 

₹2,000 Crore Allocation for FY27 

The government has budgeted ₹2,000 crore for FY27 under the incentive scheme covering RuPay debit cards and low-value BHIM-UPI person-to-merchant transactions. 

DFS said the industry's estimated cost is ₹20,700 crore. The estimate is based on a cost of ₹1.38 per transaction and 15,000 crore person-to-merchant transactions recorded last year, leaving a large gap between costs and the current allocation. 

Finance Committee Points to Funding Gap 

The Standing Committee on Finance, chaired by Bhartruhari Mahtab, flagged the issue in its 44th Report presented in the Lok Sabha on August 12. 

The committee said the ₹2,000 crore allocation covers only a fraction of the industry's estimated cost. It recommended that DFS examine a self-reliant, tiered revenue model for UPI. 

MDR Was Removed in 2020 

MDR of up to 0.30% of transaction value applied to UPI person-to-merchant transactions until December 2019. Zero MDR was introduced from January 2020 as the government sought to increase digital payment use and reduce cash transactions. 

The committee said a funding gap could affect payment service providers' spending on cybersecurity, fraud prevention and network infrastructure. 

Higher-Value Transactions May Face MDR 

The committee has backed a tiered revenue structure for higher-value merchant transactions, while seeking protection for small merchants and person-to-person transfers. 

DFS has not said what transaction values or merchant categories could attract MDR. It has also not set a date for reducing government support. 

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Conclusion 

The review comes as the estimated industry cost of UPI transactions stands at ₹20,700 crore against a ₹2,000 crore FY27 allocation. DFS is examining a tiered model to narrow this gap. Details of the proposed system are yet to be finalised. 

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