UPI transactions above Rs 2,000 to attract 0.4% MDR; check key details
The National Payments Corporation of India (NPCI) is finalising a Merchant Discount Rate (MDR) of about 0.4% on person-to-merchant (P2M) UPI transactions above Rs 2,000, to take effect from October 15.
The MDR will apply only to large-value merchant payments; a cap on the maximum per-transaction charge is being worked out.
A government gazette notification (dated September 14) under the Payment and Settlement Systems Act, 2007 continues to bar any charge — direct or indirect — on UPI transactions up to Rs 2,000, and on RuPay debit card transactions up to the same threshold.
Small everyday UPI payments (groceries, transport, and similar low-ticket purchases) remain free; industry estimates suggest roughly 95-96% of UPI transactions by volume fall below the Rs 2,000 threshold and stay unaffected.
Consumers making P2M payments will not be charged; the MDR, where applicable, is to be borne by merchants and split among banks, payment aggregators, and app providers.
Merchant Discount Rate (MDR) and the Zero-MDR Policy on UPI/RuPay
MDR is the fee a merchant pays to their bank (and, through it, to the payment network and issuing bank) for accepting a digital payment instrument, expressed as a percentage of the transaction value. In India, MDR on RuPay debit cards and BHIM-UPI transactions was set to zero with effect from 1 January 2020, through an amendment to Section 10A of the Payment and Settlement Systems Act, 2007, inserted by the Finance Act, 2019 (which also amended the Income-tax Act's Section 269SU to mandate large businesses to offer these zero-MDR digital modes).
Key Details
- Statutory basis: Section 10A, Payment and Settlement Systems Act, 2007 — no bank or system provider may impose any charge on prescribed payment systems (RuPay debit, UPI, BHIM-UPI, UPI QR) for transactions covered by the provision.
- Zero-MDR effective date: 1 January 2020.
- Section 269SU, Income-tax Act, 1961 (inserted by Finance Act 2019): mandates specified businesses with turnover above Rs 50 crore to offer these prescribed electronic modes with no charges to customers or merchants.
- The September 2026 gazette notification reaffirms the Rs 2,000 zero-charge floor while leaving the door open for MDR above that threshold, since the earlier zero-MDR mandate is not being extended to the entire transaction value.
The 0.4% MDR is being introduced only for the segment above Rs 2,000 — a carve-out from the blanket zero-MDR regime that has applied since 2020 — after industry bodies flagged that a fee-free UPI ecosystem was financially unsustainable for banks and payment service providers, particularly for high-value merchant transactions.
Government Compensation for Zero-MDR Losses: The Digital Payments Incentive Scheme
Since zero-MDR removed a revenue source for banks and payment aggregators, the Union Government has separately compensated the ecosystem through a budgeted "Incentive scheme for promotion of RuPay Debit Cards and low-value BHIM-UPI transactions (P2M)," approved by the Union Cabinet and allocated annually through the Union Budget (Ministry of Electronics and Information Technology, MeitY).
Key Details
- The scheme reimburses acquiring banks a percentage of the transaction value for low-value (below Rs 2,000) RuPay debit card and BHIM-UPI P2M transactions, to sustain the payment ecosystem despite zero MDR.
- The scheme is renewed and its outlay revised each Union Budget cycle, reflecting the rising volume of UPI transactions nationally.
- This incentive mechanism is distinct from the RBI's Payments Infrastructure Development Fund (PIDF), which subsidises the deployment of point-of-sale acceptance infrastructure rather than compensating per-transaction MDR loss.
Introducing a market-based MDR on transactions above Rs 2,000 supplements — rather than replaces — this budgetary incentive mechanism, shifting part of the cost of running high-value merchant payments away from the exchequer and onto large merchants.
Payments Infrastructure Development Fund (PIDF) and Last-Mile Acceptance
The RBI's PIDF, operationalised from 1 January 2021, is a separate mechanism aimed at expanding payment acceptance infrastructure (physical and digital point-of-sale devices) in Tier-3 to Tier-6 centres, with special focus on the North-Eastern states, rather than subsidising ongoing transaction costs.
Key Details
- PIDF corpus: Rs 500 crore, with RBI's initial contribution of Rs 250 crore (half the corpus); the remainder funded by card networks and major banks.
- Subsidises 30-50% of the cost of physical PoS terminals and 50-75% of the cost of Digital PoS (QR-code-based) infrastructure for un-terminalised merchants.
- Target: roughly 30 lakh new digital payment acceptance touchpoints annually.
- Later expanded to include beneficiaries of schemes such as PM Vishwakarma.
While PIDF addresses the supply side (getting more merchants onto digital payment rails), the new MDR addresses the demand-revenue side (making high-value UPI transactions commercially sustainable for the banks and aggregators already onboarded) — together forming the government/RBI's two-track approach to UPI's business model.
Regulatory Architecture: RBI, NPCI, and the PSS Act 2007
UPI operates under the overarching regulatory framework of the Payment and Settlement Systems Act, 2007, with the RBI as the statutory regulator and NPCI — a not-for-profit umbrella organisation set up by RBI and the Indian Banks' Association — as the retail payments system operator that actually runs UPI, RuPay, IMPS, and other rails.
The 0.4% MDR figure and its October 15 effective date are being finalised through NPCI-led consultations with banks and payment aggregators, operating within the boundaries set by the government's Section 10A notification that keeps the sub-Rs-2,000 segment free.
- Proposed MDR on P2M UPI transactions above Rs 2,000: approximately 0.4%, effective October 15.
- Zero-MDR mandate for UPI/RuPay debit (up to Rs 2,000): in force since 1 January 2020 under Section 10A, PSS Act 2007.
- Gazette notification reaffirming the Rs 2,000 zero-charge floor: dated 14 September 2026.
- Share of UPI transactions estimated to remain unaffected (below Rs 2,000 threshold): roughly 95-96% by volume.
- PIDF corpus: Rs 500 crore (RBI contribution: Rs 250 crore); operational since 1 January 2021.
- NPCI incorporated: 2008; UPI launched: 2016.