Govt sets 0.4% fee on UPI merchant payments above Rs 2,000; caps charge at Rs 300
The government notified a Merchant Discount Rate (MDR) framework for Unified Payments Interface (UPI) merchant payments: a 0.4% charge on person-to-merchant (P2M) UPI transactions above Rs 2,000, capped at Rs 300 for payments of Rs 75,000 and above, effective from 15 October 2026.
Small merchants earning up to Rs 1 lakh a month through UPI QR codes remain fully exempt from the new charge — a carve-out the government states shields roughly 96% of merchant transactions by volume from any new fee.
Differentiated rates apply to specific sectors: a flat Rs 5 per transaction for essential services such as railways, telecom, and fuel, and a lower 0.02% rate for capital market transactions; person-to-person (P2P) UPI transfers remain entirely free.
The framework ends the zero-MDR regime that had applied to UPI and RuPay debit card transactions since January 2020; consumers making UPI payments continue to face no charge, with the fee borne by merchants and shared among banks, payment aggregators, and app providers. Twenty per cent of the resulting fee revenue is earmarked to fund further expansion of UPI acceptance infrastructure among small merchants.
Merchant Discount Rate (MDR) and the Zero-MDR Policy on UPI/RuPay (2020-2026)
MDR is the fee a merchant's bank charges for accepting a digital payment, usually a percentage of the transaction value, shared among the issuing bank, the payment network, and the acquiring bank or app provider. India made MDR zero for UPI and RuPay debit card transactions from 1 January 2020 to accelerate digital payments adoption, doing so through Section 10A of the Payment and Settlement Systems Act, 2007 (inserted by the Finance Act, 2019), which barred any bank or system provider from levying charges on these prescribed payment modes.
Key Details
- Zero-MDR effective date: 1 January 2020, announced by the Finance Ministry in December 2019.
- Statutory basis: Section 10A, Payment and Settlement Systems Act, 2007, read with Section 269SU of the Income-tax Act, 1961 (inserted by the Finance Act, 2019), which required businesses above a turnover threshold to offer these zero-charge digital modes.
- Before 2020, UPI person-to-merchant transactions attracted an MDR of up to about 0.30%, similar to card-based MDR.
- Card networks (Visa, Mastercard) in India typically charge MDR in the 1-2% range, making the new 0.4% UPI MDR still well below general card MDR benchmarks.
The 2026 notification does not restore full MDR; it reintroduces a limited fee only on P2M UPI transactions above Rs 2,000, leaving the sub-Rs-2,000 segment and all P2P transfers within the continuing zero-charge protection — a partial, not complete, reversal of the 2020 policy.
The Legal Mechanism: Amending Section 10A to Enable the New Framework
Because Section 10A previously created a blanket zero-charge mandate tied rigidly to the Income-tax Act's list of prescribed payment modes, the government first needed a legislative change before any fee could be introduced — an important sequence for understanding how the new framework became possible.
Key Details
- Parliament passed amendments (via the Taxation and Other Laws (Amendment) Bill, 2026) that reworded Section 10A of the Payment and Settlement Systems Act, 2007, replacing its automatic linkage to Section 269SU of the Income-tax Act with a provision empowering the Central Government to notify eligible electronic payment modes and their charge structure directly.
- Following this amendment, a gazette notification dated 14 September 2026 reaffirmed that no charge — direct or indirect — may be levied on UPI transactions up to Rs 2,000 or on RuPay debit card transactions up to the same threshold.
- The detailed MDR structure for transactions above Rs 2,000 (the 0.4% rate, the Rs 300 cap, and sector-specific rates) was then finalised through the NPCI-led UPI and payments ecosystem consultation process, operating within the boundaries set by the government's notification.
- This two-step architecture — Parliament amends the enabling law, the Executive notifies the protected zone, industry-regulatory consultation sets the commercial terms — is a recurring pattern in India's digital payments regulation.
The 0.4% MDR announced now is the direct product of this sequence: the legislative amendment created the room for a fee to exist at all, and the framework being covered in this news is the first exercise of that new discretion.
Institutional Architecture: RBI, NPCI, and the PSS Act, 2007
UPI functions within a two-tier regulatory structure: the Reserve Bank of India as the statutory regulator of all payment systems, and the National Payments Corporation of India (NPCI) as the not-for-profit entity that actually operates UPI, RuPay, and other retail payment rails.
Key Details
- The Payment and Settlement Systems Act, 2007 empowers the RBI to authorise, regulate, and oversee all payment systems in India; Section 4 requires RBI authorisation to operate any payment system.
- NPCI was incorporated in December 2008 as a Section 25 (now Section 8) not-for-profit company, set up jointly by the RBI and the Indian Banks' Association; it launched UPI in April 2016.
- UPI has grown to become the dominant digital payment rail in India, processing roughly 85% of India's digital payment volumes and around 49% of global real-time payment transaction volume in 2026.
- The RBI has publicly backed the new MDR framework, reiterating that consumers will continue to face no charges on UPI payments.
The scale UPI has reached — tens of billions of transactions a year — is precisely why banks and payment service providers argued a permanently zero-revenue model on high-value merchant payments was commercially unsustainable, driving this policy shift.
Financial Inclusion Safeguard: the Small-Merchant Exemption
The Rs 1-lakh-a-month exemption threshold reflects a recurring policy design pattern in Indian digital-payments regulation: protecting small and marginal merchants from new costs even while introducing market-based pricing for larger players, to avoid reversing financial inclusion gains.
Key Details
- Merchants transacting up to Rs 1 lakh a month via UPI QR codes are fully exempt from the new MDR, regardless of individual transaction size, provided they stay under this monthly threshold.
- The government states this exemption covers approximately 96% of UPI merchant transactions by volume, meaning the new fee is concentrated on a small number of high-value, high-turnover merchants.
- This complements the pre-existing Incentive Scheme for Promotion of RuPay Debit Cards and low-value BHIM-UPI transactions, under which the government has separately reimbursed banks for low-value transaction costs since 2020, and the RBI's Payments Infrastructure Development Fund (PIDF, operational since January 2021), which subsidises acceptance-infrastructure deployment for small merchants in Tier-3 to Tier-6 towns.
- Twenty per cent of new MDR revenue is earmarked for further UPI acceptance-infrastructure expansion among small merchants, extending this inclusion objective.
The exemption design shows the government calibrating the policy to preserve UPI's mass-adoption, financial-inclusion character for the vast majority of small merchants while addressing the revenue-sustainability concerns raised by banks and payment aggregators for large-value merchant transactions.
- New MDR: 0.4% on UPI P2M transactions above Rs 2,000, capped at Rs 300 for transactions of Rs 75,000 and above; effective 15 October 2026.
- Small-merchant exemption: full exemption for merchants transacting up to Rs 1 lakh/month via UPI QR, covering an estimated 96% of merchant transactions by volume.
- Sector-specific rates: flat Rs 5 per transaction for railways, telecom, and fuel; 0.02% for capital market transactions; P2P transfers remain free.
- Zero-MDR regime (being partially ended): in force since 1 January 2020 under Section 10A, Payment and Settlement Systems Act, 2007.
- Legal enabler: Taxation and Other Laws (Amendment) Bill, 2026, amending Section 10A; gazette notification dated 14 September 2026 protects UPI/RuPay transactions up to Rs 2,000.
- NPCI incorporated: 2008; UPI launched: April 2016; UPI's share of India's digital payment volume: approximately 85% (FY 2025-26).
- Revenue earmarking: 20% of new MDR proceeds allocated to expand UPI acceptance infrastructure for small merchants.