In a bid to encourage electronic payments, the central government will reimburse the Merchant Discount Rate (MDR) applicable on transactions up to Rs 2,000 for the next two years.

According to the Minister of Electronics, IT and Law and Justice Ravi Shankar Prasad, the government will reimburse the MDR levied on transactions conducted via debit cards, BHIM UPI and Aadhaar enabled Payment System (AePS) on a transaction value of up to Rs 2,000 from January 1, 2018.

The decision to reimburse MDR to banks was taken by the Union Cabinet in its meeting held on Friday.

"The government today has taken a very major decision to accelerate digital payments in the country -- MDR charges -- of up to transactions worth Rs 2,000 shall now be reimbursed by the government," Prasad said at a press conference after the Cabinet meeting.

Consequent to the decision, transactions less than Rs 2,000 in value will not bear any additional form of MDR.

The reimbursements are estimated to cost the state exchequer Rs 1,050 crore in FY2018-19 and Rs 1,462 crore in FY2019-20.

The decision also entails formation of a committee comprising of "Secretary Department of Financial Services, Secretary Ministry of Electronics and IT and the CEO, National Payment Corporation of India (NPCI)" to look into the industry cost structure of such transactions which will form the basis to determine the levels of reimbursement.

The Union cabinet's decision follows the December 6, 2017 norms issued by the Reserve Bank of India (RBI) which put a cap on MDR applicable on transactions conducted via debit cards from January 1, 2018.

The RBI capped MDR for debit card transactions based on two newly created categories -- small merchants with turnover up to Rs 20 lakh and other merchants with turnover above Rs 20 lakh.

Accordingly, cap on PoS (Point of Sales) was kept at Rs 1,000 per transaction or 0.90 per cent of the transaction value for "other merchants", while that of Rs 200 or 0.40 per cent has been set for "small merchants".

The MDR for QR code-based transaction has been capped at Rs 200 or 0.30 per cent for "small merchants" and Rs 1,000 or 0.80 per cent for "other merchants".