The government will bear the MDR charges on transactions up to Rs 2,000 made through debit cards, BHIM UPI or Aadhaar-enabled payment systems to promote digital transactions, IT Minister Ravi Shankar Prasad said today.

MDR is charged on payments made to merchants through BHIM UPI platform and AePS (Aadhaar enabled Payment System).

The merchant discount rate (MDR) will be borne by the government for two years with effect from January 1, 2018 by reimbursing the same to the banks.

The move will have an impact of Rs 2,512 crore on the exchequer.

The decision was taken at the Cabinet meeting chaired by Prime Minister Narendra Modi, Prasad said.

"For all the transactions less than Rs 2,000 in value, the consumer and the merchant will not suffer any additional burden in the form of MDR," the minister said, adding this will lead to greater adoption of digital payment modes for such transactions.

The minister said since such transactions account for sizable percentage of transaction volume, the decision will help move towards less-cash economy.

Prasad further said digital transactions during April -September 2017 were valued at 2.18 lakh crore.

"This amount is estimated to be Rs 4.37 lakh crore for the whole of the current financial year," the minister added.

When payment is made at a merchant point of sale, MDR is payable by the trader to the bank.

Citing this, many people make cash payments in spite of having debit cards.

A committee comprising Secretary, Department of Financial Services, Secretary, Ministry of Electronics & IT, and the CEO, National Payment Corporation of India (NPCI), will look into the industry cost structure of such transactions which will form the basis to determine the levels of reimbursement, Prasad said.

In order to promote digital payments, the Reserve Bank has also came out with differentiated merchant discount rates (MDR) for debit card transactions, prescribing separate caps for small and large traders.

As per the RBI's notification, MDR charges for small merchants with an annual turnover of up to Rs 20 lakh has been fixed at 0.40 per cent with a cap of Rs 200 per transaction by debit cards through Point of Sale (PoS) machines or online transactions.

In case the annual turnover of a merchant is over Rs 20 lakh, the MDR charges would be 0.90 per cent with a cap of Rs 1,000 per transaction. If transaction is through QR code, the charges will be 0.80 per cent with a similar cap.

Commenting on the development, Axis Bank MD Shikha Sharma said the government has taken various steps to promote digital transaction. This is very progressive move and will promote digital transaction.