Merchants to be charged 0.4% for UPI transactions over ₹2,000; small vendors exempt
A 0.4% Merchant Discount Rate (MDR) has been introduced on Person-to-Merchant (P2M) UPI transactions above ₹2,000, applicable from 15 October 2026, with the charge capped at ₹300 for transactions of ₹75,000 and above.
The Ministry of Finance clarified that Person-to-Person (P2P) transactions, which constitute about 70% of the total value of UPI transactions, remain fully exempt from any charge.
Small merchants transacting through the Person-to-Person-Merchant (P2PM) framework — those receiving up to a specified monthly limit via UPI QR codes directly into their accounts — continue to be exempt from the MDR.
According to the Ministry, only about 4% of merchant transactions will actually attract the new charge; the cost falls on merchants, not consumers, who continue to use UPI free of charge. Select categories such as railways, telecom, insurance, and fuel retail will instead attract a flat ₹5 charge per transaction above ₹2,000.
Merchant Discount Rate (MDR) and the Zero-MDR Policy on UPI
The Merchant Discount Rate (MDR) is the fee a merchant pays to their bank/payment aggregator (and indirectly to the payment network) for processing a digital transaction, historically used to recover the operating and infrastructure costs of running the payment rails. In 2019, the Government of India amended the Payment and Settlement Systems (PSS) Act, 2007 to set MDR on UPI (and RuPay debit card) transactions to zero, effective 1 January 2020, to accelerate digital payments adoption; before this, a merchant fee of up to about 0.30% applied to UPI P2M transactions. To offset the revenue banks and payment service providers lost under zero-MDR, the government introduced a separate budgetary incentive scheme reimbursing banks for UPI/RuPay transaction costs, administered by the Ministry of Electronics and Information Technology (MeitY).
Key Details
- Statutory basis: Payment and Settlement Systems Act, 2007, as amended in 2019 (zero-MDR effective 1 January 2020).
- Zero-MDR applied specifically to person-to-merchant (P2M) UPI and RuPay debit card transactions.
- A government incentive/subsidy scheme has separately compensated banks for a portion of foregone MDR revenue since FY 2021-22.
The reintroduction of a 0.4% MDR (via the same PSS Act framework, amended further through 2026 legislative changes) partially reverses the six-year-old zero-MDR policy, but narrowly — confined to larger-value merchant transactions — while preserving zero cost for consumers and small/P2P transactions.
UPI (Unified Payments Interface) and NPCI
UPI is a real-time payment system enabling instant interbank fund transfers via mobile devices, built and operated by the National Payments Corporation of India (NPCI), an RBI-promoted umbrella organisation for retail payment systems, and launched for public use in April 2016. UPI operates under the regulatory oversight of the Reserve Bank of India (RBI) and the legal framework of the PSS Act, 2007. It has since become the dominant digital payment rail in India by transaction volume, underpinning both P2P transfers and P2M merchant payments, and has also been extended internationally through bilateral linkages with select countries.
Key Details
- Launched April 2016; built and operated by NPCI, promoted by RBI along with Indian Banks' Association (IBA).
- Legal/regulatory basis: PSS Act, 2007, with RBI as the designated regulator for payment systems.
- UPI transaction data is compiled and released periodically by NPCI; P2P transactions form the majority of UPI's total transaction value.
As the entity administering the UPI network, NPCI is the body that operationally notified the new 0.4% MDR structure, working within the PSS Act framework and in coordination with the Ministry of Finance's broader digital payments policy.
Digital Payment Infrastructure Sustainability and Policy Trade-offs
Zero-cost payment infrastructure is not cost-free to run — banks, payment aggregators, and NPCI incur real costs for switching, settlement, fraud risk management, and system upgrades. A prolonged zero-MDR regime raises concerns about the long-term financial sustainability of the ecosystem and can crowd out private investment in payment infrastructure, a concern periodically raised by payments-industry bodies. Reintroducing a modest, narrowly targeted MDR (only on larger-value merchant transactions, with small merchants and all consumer transactions exempted) is presented as a calibrated attempt to balance digital payment adoption goals with ecosystem sustainability, without reversing India's broader financial inclusion push.
Key Details
- Financial inclusion architecture around UPI includes Jan Dhan-Aadhaar-Mobile (JAM) trinity and the Pradhan Mantri Jan Dhan Yojana (PMJDY, launched 2014) as complementary pillars.
- Payments industry bodies have periodically petitioned the government to reconsider zero-MDR, citing sustainability of investment in payment rails.
- The new structure differentiates by transaction size and merchant category rather than a uniform rate, an example of calibrated/tiered regulatory design.
The MDR reintroduction reflects this sustainability debate being resolved through a targeted rather than uniform charge — preserving the zero-cost, high-inclusion character of UPI for consumers, P2P transfers, and small merchants while asking only the highest-value 4% of merchant transactions to bear a processing cost.
- New MDR: 0.4% on UPI P2M transactions above ₹2,000, effective 15 October 2026; capped at ₹300 for transactions of ₹75,000 and above.
- P2P transactions (~70% of total UPI transaction value) and small P2PM merchants remain fully exempt.
- Only an estimated 4% of merchant transactions are expected to attract the new charge.
- Select categories (railways, telecom, insurance, fuel) attract a flat ₹5 charge per transaction above ₹2,000 instead of the 0.4% rate.
- Zero-MDR on UPI P2M and RuPay debit transactions had been in effect since 1 January 2020 under the PSS Act, 2007 (as amended 2019).