Charges, framework, dedicated fund — How MDR on UPI works for micro and small merchants, explained
From 15 October 2026, a Merchant Discount Rate (MDR) of 0.4% applies to person-to-merchant (P2M) UPI transactions above ₹2,000, capped at ₹300 per transaction (the cap is reached at a transaction value of ₹75,000)
Specified merchant categories such as railways, telecom, insurance, and fuel retailers will instead attract a flat MDR of ₹5 per transaction above ₹2,000
UPI transactions up to ₹2,000 and all person-to-person (P2P) transfers remain free of any MDR
A dedicated fund, financed by allocating a share of MDR collections, has been proposed to support small-merchant onboarding and digital payment infrastructure in smaller towns, with the detailed framework to be finalised in consultation with the Reserve Bank of India
The Zero-MDR Regime and Its Legal Basis (2020-2026)
UPI and RuPay debit card transactions have operated under a "zero-MDR" regime since January 2020, meaning banks and payment service providers could not charge merchants any fee on these transactions. This regime is the direct backdrop against which the reintroduction of MDR must be understood.
Key Details
- Zero-MDR was implemented through amendments to Section 10A of the Payment and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act, 1961, following the push for digital payments after 2016
- The government compensated banks and payment service providers to the extent of about 0.15% for UPI transactions below ₹2,000, but did not similarly subsidise larger transactions
- Parliament amended the Payment and Settlement Systems Act in August 2026, replacing the blanket zero-MDR prohibition with a framework allowing the Central Government to notify, by executive order, which payment modes remain MDR-exempt
- This amendment is the legal instrument that enables the 15 October 2026 introduction of MDR on higher-value UPI merchant transactions
The 0.4% MDR taking effect is the first practical outcome of the 2026 amendment to Section 10A, ending the six-year-old blanket zero-MDR position for large-value UPI merchant payments.
NPCI and the Regulatory Architecture of Retail Payments
The National Payments Corporation of India (NPCI) operates UPI as the umbrella organisation for retail payment systems in India, functioning under the regulatory oversight of the Reserve Bank of India.
Key Details
- NPCI was incorporated as a Section 8 (not-for-profit) company, promoted by the RBI and the Indian Banks' Association (IBA), and it operates payment systems including UPI, RuPay, IMPS, and NACH
- The RBI regulates payment systems in India under the Payment and Settlement Systems Act, 2007, including the authority to designate and oversee systemically important payment systems
- MDR itself is distinct from the "interchange fee" — MDR is the total charge borne by the merchant for accepting a digital payment, part of which may be passed on as interchange to the issuing bank
The framework for the new UPI MDR, including the merchant fund and threshold design, is being finalised jointly by NPCI (the system operator) and the RBI (the regulator), reflecting the institutional division of labour in India's payments ecosystem.
Balancing Fee Recovery with Financial Inclusion Goals
The design of the new MDR — free below ₹2,000, tiered for high-value transactions, and partly redirected into a small-merchant support fund — reflects an attempt to reconcile industry demands for fee recovery with the government's continuing financial inclusion and digital payments push.
Key Details
- Industry bodies such as the Payments Council of India had for several years sought a reconsideration of zero-MDR, citing the unsustainable cost burden on banks and payment service providers of processing UPI transactions at scale without fee income
- The proposed fund would channel a share of MDR collections toward merchant onboarding and digital payment infrastructure in Tier-3 to Tier-6 towns, including the Northeast, Jammu & Kashmir, and Ladakh
- Retaining zero MDR for transactions up to ₹2,000 preserves the low-ticket, high-frequency use case (small kirana purchases, street vendors) that UPI's inclusion mandate was originally built around
The tiered MDR structure is designed so that the reintroduction of merchant fees funds ecosystem expansion into underserved regions rather than simply becoming a cost to be passed on to small merchants and consumers.
- MDR on P2M UPI transactions above ₹2,000: 0.4%, effective 15 October 2026
- Cap on MDR: ₹300 per transaction, reached at a transaction value of ₹75,000
- Flat MDR for specified categories (railways, telecom, insurance, fuel, etc.): ₹5 per transaction above ₹2,000
- Transactions up to ₹2,000 and all P2P transfers: remain free of MDR
- Zero-MDR regime in force: January 2020 to October 2026, under Section 10A of the PSS Act, 2007 and Section 269SU of the Income-tax Act, 1961
- Parliament amendment enabling MDR's return: passed August 2026
- Proposed small-merchant fund: to be financed from a share of MDR collections, framework to be finalised with RBI within three months