UPI’s new MDR pot: 5% of collections to be used for bringing small merchants online
The National Payments Corporation of India (NPCI) is introducing a Merchant Discount Rate (MDR) on select high-value Person-to-Merchant (P2M) UPI transactions, effective from 15 October 2026.
A dedicated fund, built from 5% of MDR collections, will be created to expand digital payment infrastructure and onboard small merchants, particularly in Tier-3 to Tier-6 towns, the Northeast, Jammu & Kashmir, and Ladakh.
Small merchants receiving up to ₹1 lakh per month via UPI QR codes will remain exempt from the new MDR, preserving zero-cost UPI access for the smallest businesses.
The framework is aimed at making UPI's merchant-payment ecosystem financially self-sustaining while continuing rural and small-town expansion.
Merchant Discount Rate (MDR) and UPI's Zero-MDR History
MDR is the fee a merchant's bank charges for processing a digital payment, typically shared among the acquiring bank, issuing bank, and payment network. Since January 2020, MDR on UPI and RuPay debit card transactions was set to zero through amendments to Section 10A of the Payment and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act, 1961, to promote adoption of digital payments over cash.
Key Details
- Zero-MDR was compensated to banks and payment service providers via a government-funded Incentive Scheme for Promotion of RuPay Debit Cards and low-value BHIM-UPI (P2M) transactions, approved by the Union Cabinet and disbursed through the Ministry of Electronics and IT.
- The current change reintroduces MDR (reported around 0.4%) only on select high-value P2M UPI transactions above a threshold (reported as ₹2,000), while transactions below this threshold and small merchants stay MDR-free.
- This marks a shift after roughly six years of a zero-charge UPI merchant-payment regime.
The 5% small-merchant fund is carved directly out of this newly reintroduced MDR, meaning the same mechanism that ends blanket zero-MDR also earmarks part of its proceeds for the financial-inclusion goal the original zero-MDR policy was designed to serve.
NPCI and the UPI/RuPay Institutional Architecture
The National Payments Corporation of India (NPCI) is a not-for-profit umbrella organisation for retail payments and settlement systems in India, incorporated under Section 25 of the Companies Act, 1956 (now Section 8 of the Companies Act, 2013), and promoted by the Reserve Bank of India along with major banks. NPCI operates UPI, RuPay, IMPS, and other national retail payment rails, and functions as an authorised payment system operator under the Payment and Settlement Systems Act, 2007.
Key Details
- NPCI launched UPI in 2016 to enable real-time, interoperable bank-to-bank transfers via a single mobile application/VPA (Virtual Payment Address).
- As the operator of the UPI network, NPCI sets and revises the interchange/MDR structure for the ecosystem, subject to RBI oversight and government policy on zero/low-cost digital payments.
- UPI's growth has been central to India's Digital Public Infrastructure (DPI) stack, alongside Aadhaar and the Data Empowerment and Protection Architecture, and is cited internationally as a model for real-time payment systems.
As the network operator, NPCI is directly administering this new MDR-linked fund, using its regulatory role over UPI's fee architecture to channel proceeds toward extending merchant digitisation goals it has pursued since UPI's 2016 launch.
- New UPI MDR on select high-value P2M transactions effective from 15 October 2026.
- 5% of MDR collections will be routed into a dedicated small-merchant digitisation fund.
- Small merchants receiving up to ₹1 lakh per month via UPI QR remain MDR-exempt.
- Zero-MDR on UPI/RuPay debit cards had been in effect since January 2020 under the Payment and Settlement Systems Act, 2007 (Section 10A) and Income-tax Act, 1961 (Section 269SU), until this reintroduction.