Explainer -- India's UPI MDR shake-up: What changes and why it matters
A gazette notification was issued mandating a Merchant Discount Rate (MDR) of 0.4% on Person-to-Merchant (P2M) UPI transactions above ₹2,000, effective from 15 October 2026
UPI transactions up to ₹2,000, and all Person-to-Person (P2P) transactions of any value, remain free of any charge
Small merchants receiving up to ₹1 lakh a month through UPI QR codes directly into their bank accounts continue to enjoy zero MDR regardless of transaction size
Transactions of ₹75,000 and above will attract a capped maximum charge of ₹300 per transaction rather than an uncapped percentage fee
The change is aimed at making the UPI payment ecosystem more financially self-sustaining for banks and payment service providers while preserving free access for small merchants and low-value transactions
Zero-MDR Policy on UPI and RuPay (2020)
Since January 2020, MDR was made zero for RuPay debit card and BHIM-UPI transactions, through amendments to Section 10A of the Payment and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act, 1961. Section 269SU required businesses with turnover above ₹50 crore to mandatorily offer these no-charge digital payment modes, positioning zero-MDR as a demonetisation-era push for digital adoption rather than a permanent subsidy.
Key Details
- UPI is operated by the National Payments Corporation of India (NPCI), a not-for-profit entity set up under Section 8 of the Companies Act, promoted by the Reserve Bank of India (RBI) and the Indian Banks' Association
- The Payment and Settlement Systems Act, 2007 is the principal law empowering the RBI to regulate and supervise payment systems in India
- The government has separately run an Incentive Scheme reimbursing banks for the cost of processing zero-MDR BHIM-UPI P2M transactions, funded from the Union Budget, precisely because zero-MDR meant banks bore transaction costs without fee income
- The new 0.4% MDR only applies above the ₹2,000 threshold, so the original zero-MDR guarantee for small-value and P2P transactions is retained, not repealed
This notification marks the first structural exception carved into the zero-MDR regime since 2020 — introducing a fee only where transaction value exceeds ₹2,000, rather than reversing the policy for the broad base of small digital payments.
Merchant Discount Rate (MDR) as a Payment System Concept
MDR is the fee a merchant pays to their bank or payment aggregator for the infrastructure that processes an electronic payment; it is typically expressed as a percentage of transaction value and is distinct from any charge levied on the customer. Card-based MDR (historically 0.4%–2% depending on card network and merchant category) funds the interchange paid between issuing and acquiring banks — a cost structure UPI never had once MDR was zeroed in 2020.
Key Details
- Prior to zero-MDR, RBI capped debit card MDR at 0.40% for transactions up to ₹2,000 and 0.90%–1% for higher values, showing the ₹2,000 threshold has long been used as a differentiator in Indian payment regulation
- MDR is charged to the merchant, not the customer, distinguishing it from a "convenience fee" or surcharge that some platforms separately levy on payers
- The RBI's Payment and Settlement Systems Vision documents have periodically flagged the sustainability of a zero-MDR regime as a risk to long-term investment in payment infrastructure by banks and NPCI
By reintroducing MDR only for larger merchant transactions, the government is testing a middle path — keeping the "public good" framing of free UPI for ordinary consumers and small merchants while creating a revenue stream to sustain the ecosystem's costlier, higher-value merchant transactions.
UPI's Scale and India's Digital Payments Push
UPI has become the backbone of India's Digital Public Infrastructure (DPI) stack alongside Aadhaar and the India Stack, and is central to India's G20-era digital payments diplomacy, including bilateral UPI linkages with countries such as Singapore, UAE, Sri Lanka, and France.
Key Details
- UPI monthly transaction volume touched a record 24.51 billion transactions worth ₹29.82 trillion in August 2026, up about 22% year-on-year in volume
- UPI was launched by NPCI in 2016 under the RBI's payment systems mandate
- India's DPI model (UPI, Aadhaar, DigiLocker) has been cited at G20 and international forums as an exportable framework for financial inclusion
The scale UPI has reached is itself the reason a sustainability question has arisen — a system processing tens of billions of transactions monthly cannot indefinitely operate on a zero-revenue model for the banks and switches that run it.
- New MDR: 0.4% on P2M UPI transactions above ₹2,000, effective 15 October 2026
- No charge on UPI/P2M transactions up to ₹2,000 and on all P2P transactions
- Cap on MDR for high-value transactions: ₹300 maximum on transactions of ₹75,000 and above
- Small merchants exempt: those receiving up to ₹1 lakh/month via UPI QR directly into their bank account
- Zero-MDR on UPI and RuPay debit cards has been in force since January 2020 (Section 269SU, Income-tax Act, 1961; Section 10A, Payment and Settlement Systems Act, 2007)
- UPI processed a record 24.51 billion transactions worth ₹29.82 trillion in August 2026 (NPCI data)