UPI MDR: What changes for merchants, consumers and payments above Rs 2,000 from October 15

NEW DELHI, SEP 15 : Ending nearly six years of zero-fee UPI merchant payments, the government on Tuesday introduced a 0.4 per cent Merchant Discount Rate (MDR) on person-to-merchant (P2M) UPI transactions above Rs 2,000, with the new framework coming into effect from October 15.

The government, however, has ring-fenced person-to-person payments and low-value merchant transactions from the levy, while stressing that consumers will continue to use UPI free of cost.

 “Customers will not be required to pay any charge when making such payments through UPI,” the Finance Ministry said, clarifying that MDR is a charge within the merchant payment ecosystem and “not a charge on customers making UPI payments”.

Individuals will also continue to have unlimited free UPI usage, with no monthly quotas, volume restrictions or tiered caps on free transactions.

What will be charged

From October 15, merchants will pay an MDR of 0.4 per cent on P2M UPI transactions above Rs 2,000. The charge will be capped at Rs 300 for transactions of Rs 75,000 and above.

For instance, a Rs 3,000 UPI purchase will attract an MDR of Rs 12, while a Rs 50,000 payment will attract Rs 200. A Rs 1 lakh payment, which would ordinarily attract Rs 400 at 0.4 per cent, will instead attract the Rs 300 cap.

The commission will be distributed among participants in the UPI ecosystem, including banks and app providers. The government and National Payments Corporation of India (NPCI) said the revenue will support infrastructure resilience, cybersecurity, innovation and customer service.

The MDR applies to direct user-account-to-merchant-account UPI payments. Credit-linked transactions, including RuPay Credit Card on UPI and pre-sanctioned credit lines, will follow separate rules.

Person-to-person (P2P) UPI transactions will continue to attract no charges, irrespective of their value. P2P payments account for around 37 per cent of UPI’s transaction volume and 70 per cent of its value, according to the framework.

P2M transactions of up to Rs 2,000 will also remain outside the MDR regime. The government said such transactions account for more than 95 per cent of total P2M transaction volume.

Small merchants receiving up to Rs 1 lakh a month through UPI QR codes under the Person-to-Person-Merchant (P2PM) framework will continue to pay zero MDR on all transactions.

The P2PM framework is aimed at small vendors and does not require them to register for GST or upgrade their existing QR infrastructure. Merchants exceeding the Rs 1 lakh monthly threshold for three consecutive months will move into the standard P2M category.

Overall, only about 4 per cent of merchant transactions are expected to be affected by the introduction of MDR.

Lower rates for essential sectors

The framework provides separate rates for sectors where high transaction volumes or thin margins could make the standard MDR burdensome.

Railways, telecom, insurance, fuel and agricultural inputs will attract a flat Rs 5 MDR on transactions above Rs 2,000. These sectors account for nearly 17 per cent of P2M transaction volume but around 46 per cent of its value.

The same flat-fee treatment will apply to government utility bill payments, including electricity, water and piped gas, as well as educational fee payments such as school and university fees.

Payments involving mutual funds, securities, stockbrokers and dealers will attract a lower MDR of 0.02 per cent, capped at Rs 300.

Automated recurring payments through UPI mandates or AutoPay, including utility bills, OTT subscriptions and recurring investments, will not attract MDR.

The government has also sought to prevent the new MDR from becoming a direct cost for UPI users.

UPI app providers have been prohibited from imposing platform fees or hidden charges, while banks have been advised to ensure that merchants do not pass MDR costs on to customers.

There will also be no monthly quotas, volume limits or tiered caps on free UPI transactions for individuals. Existing daily transaction limits of Rs 1 lakh to Rs 5 lakh, depending on the category, will remain risk-management measures imposed by banks and NPCI rather than commercial charges.

Why introduce MDR now?

The move ends the zero-MDR regime introduced in January 2020 to accelerate UPI adoption. While the policy helped UPI become the backbone of India’s retail digital payments system, banks, payment service providers and fintech companies have for years argued that maintaining the network without a direct revenue stream was unsustainable.

The Payments Council of India, whose members include Airtel Payments Bank, Amazon Pay, Google Pay, Cashfree and Jio Payments Bank, had sought a reconsideration of the zero-MDR policy. Banks had also pushed for charges on larger merchants.

RBI Governor Sanjay Malhotra recently summed up the issue by saying that “someone has to pay the cost”, while noting that the decision on MDR rests with the government.

UPI processed 2,451 crore transactions worth Rs 29.9 lakh crore in August 2026 alone, according to government data cited by news agency PTI.

Industry estimates put the annual cost of running UPI infrastructure, including server bandwidth, fraud prevention and bank technical support, at around Rs 20,000 crore, PTI reported. The government had previously supported the zero-MDR model through budgetary incentives, with roughly Rs 2,000 crore a year allocated to the scheme.

Parliament’s Standing Committee on Finance had also warned that the zero-MDR regime was putting pressure on government finances and limiting the ecosystem’s ability to invest in long-term infrastructure, calling a viable revenue mechanism critical to UPI’s financial sustainability.

Under the new framework, 5 per cent of total MDR collections will be placed in a dedicated fund to promote UPI adoption among small merchants, particularly in smaller and underserved markets.

The revised MDR and threshold structure will come into effect on October 15, 2026.

-PTI