New Delhi, India – The Indian government announced on September 14, 2026, that banks and payment system providers are prohibited from charging fees on Unified Payments Interface (UPI) transactions valued up to ₹2,000. However, transactions exceeding this threshold are not covered by this exemption, potentially paving the way for the introduction of a Merchant Discount Rate (MDR).
These changes are being implemented under the Payment and Settlement Systems Act, establishing a legal framework for potential future charges on higher-value UPI transactions.
What is Merchant Discount Rate (MDR)?
MDR is a fee paid by merchants for accepting digital payments. It is typically calculated as a percentage of the transaction value and is distributed among various entities involved in processing the payment, including banks, payment networks, and service providers. While credit card transactions often incur an MDR of 1-3% and debit cards up to 0.9%, UPI has operated under a zero-MDR regime since January 2020, meaning merchants have not paid a fee for accepting UPI payments.
Government's Stance on UPI Charges
The recent notification clarifies that an MDR is not yet imposed on UPI. Instead, it creates the legal authority for the government to decide which electronic payment modes or transactions should remain free. The specific rates and categories of transactions that might attract MDR are still under discussion. Reports suggest a nominal rate of approximately 0.4% could be considered for some high-value person-to-merchant (P2M) transactions.
It is important to note that person-to-person (P2P) transfers, such as sending money to friends or family, regardless of the amount, are expected to remain free.
Potential Impact on Consumers and Merchants
While MDR is technically a charge on merchants, consumers could indirectly bear the cost if businesses choose to pass these fees on, a practice already observed with some credit card transactions. High-value transactions, those above ₹2,000, represent a significant portion of UPI's total value. In 2025-26, these transactions accounted for only about 4% of P2M UPI transaction volume but nearly two-thirds of their total value.
Finance Minister Nirmala Sitharaman stated in August during a parliamentary session that any MDR introduced on digital payments would be charged to merchants, not directly to customers. She emphasized that MDR aims to strengthen the digital payments ecosystem by enabling banks and fintech companies to invest further in infrastructure, innovation, cybersecurity, and fraud prevention, ultimately benefiting UPI users.
Why the Consideration Now?
The rapid expansion of UPI, with over 55 crore users and hundreds of facilitating entities, has led to increased costs for maintaining its infrastructure, cybersecurity, and fraud-prevention systems. Industry estimates suggest the annual cost of operating the ecosystem is around ₹20,000 crore. The government cites rising transaction volumes, greater competition, and the need for financial sustainability as key reasons for re-evaluating the zero-MDR model.
The UPI and Services Steering Committee, headed by NPCI, is tasked with examining the issue following the passage of the Taxation and Other Laws (Amendment) Bill, 2026. The crucial question remains how any fee would be structured and whether merchants would absorb it or pass it on to consumers. If limited and nominal, the impact on everyday UPI users may be minimal.