Merchant fee on UPI rolling out as transaction floor set at Rs 2,000
The Central Government has notified that UPI and RuPay debit card transactions up to Rs 2,000 will remain free of any Merchant Discount Rate (MDR), while transactions above this threshold may now attract a nominal charge.
This follows Parliament's passage of the Taxation and Other Laws (Amendment) Act, 2026, which amended the Payment and Settlement Systems Act, 2007, ending the blanket zero-MDR mandate that had applied since January 2020.
Rather than fixing charges directly, the amended framework empowers the Central Government to notify by order which payment modes and transaction bands can attract MDR, replacing the earlier automatic, all-transactions-free linkage to Section 269SU of the Income-tax Act, 1961.
A detailed operational directive on the exact MDR structure for above-threshold transactions is expected from the National Payments Corporation of India (NPCI), which will administer the change through the UPI and Services Steering Committee.
Officials have indicated the reintroduced charges will be nominal and apply only to a limited slice of merchant transactions, since data shows only about 4% of person-to-merchant UPI transactions in 2025–26 exceeded Rs 2,000 (though that slice accounts for roughly two-thirds of UPI payment value).
Merchant Discount Rate (MDR) and the Zero-MDR Policy (2020–2026)
MDR is the fee a merchant pays their bank/payment processor for accepting a digital payment, historically covering the costs of card networks, acquiring banks, and payment gateways (commonly 1–3% for cards). In January 2020, the government made MDR zero on UPI and RuPay debit card transactions specifically to accelerate adoption of low-cost digital payments as part of the government's Digital India push, doing so through amendments to Section 10A of the Payment and Settlement Systems Act, 2007, and Section 269SU of the Income-tax Act, 1961.
Key Details
- Section 269SU of the Income-tax Act separately mandated that businesses with annual turnover above Rs 50 crore must offer UPI and RuPay debit card as payment options to customers, reinforcing the acceptance-infrastructure side of digital payments alongside the fee side.
- Zero MDR removed the revenue banks and NPCI would otherwise earn from UPI transactions, and the government instead ran a separate incentive scheme (cabinet-approved subsidy to banks/NPCI) to compensate for the lost fee revenue and sustain UPI infrastructure investment.
- The Taxation and Other Laws (Amendment) Act, 2026 (assented to in August 2026) delinked the payment-charge exemption from a fixed statutory list and gave the Centre discretionary, notification-based power to decide which transactions remain free — a shift from a rule-based to an executive-discretion-based regime.
The Rs 2,000 free-transaction floor is the government's first concrete notification under this new discretionary power, preserving zero-MDR for the vast majority of small, everyday UPI/RuPay payments while opening the door to fees on higher-value merchant transactions.
NPCI and the Institutional Architecture of UPI
The National Payments Corporation of India (NPCI) is the umbrella organisation for retail payments and settlement systems in India, set up in 2008 under the RBI's guidance and operating under Section 4 of the Payment and Settlement Systems Act, 2007 as a not-for-profit entity (Section 8 company). It owns and operates UPI (launched 2016) as well as RuPay, India's domestic card network built as an alternative to Visa/Mastercard.
Key Details
- The Payment and Settlement Systems Act, 2007 is the parent legislation giving the RBI regulatory and supervisory authority over all payment systems in India, including UPI; NPCI operates as an authorised payment system operator under this Act.
- NPCI's "UPI and Services Steering Committee" is the body now expected to issue the detailed MDR directive for above-threshold transactions, showing how operational rule-making for payment charges is delegated from the central government to this NPCI-run committee rather than legislated directly.
- RuPay was launched by NPCI in 2012 as a domestic alternative to reduce dependency on foreign card networks and lower transaction-processing costs, aligning with broader financial self-reliance objectives.
The upcoming NPCI directive on MDR structure will operationalise the government's Rs 2,000 threshold notification, illustrating the standard division of labour under the PSS Act, 2007: Parliament/the Centre sets the legal framework and thresholds, while NPCI designs and implements the transaction-level rules.
- The Rs 2,000 threshold below which UPI and RuPay debit card transactions remain MDR-free was set following the Taxation and Other Laws (Amendment) Act, 2026.
- Zero MDR on UPI/RuPay debit cards was originally introduced via amendments to the Payment and Settlement Systems Act, 2007, and Section 269SU of the Income-tax Act, 1961, effective January 2020.
- Only about 4% of person-to-merchant UPI transactions in 2025–26 were above Rs 2,000, but this segment made up roughly two-thirds of total UPI payment value.
- NPCI, set up in 2008, is the operator of both UPI (2016) and RuPay (2012), functioning as an authorised payment system operator under the PSS Act, 2007.