Starting October 15, 2026, a new Merchant Discount Rate (MDR) of 0.02% will be applied to Unified Payments Interface (UPI) transactions within capital market segments. This charge, capped at Rs 300 per transaction, will specifically affect payments related to mutual funds, securities, and activities involving stockbrokers and dealers.
The Ministry of Finance has introduced this concessional rate to foster continued retail engagement in formal financial markets while ensuring the long-term viability of the digital payments infrastructure. For context, a Rs 1 lakh transaction would incur an MDR of Rs 20, with the Rs 300 cap limiting the cost on larger sums. This rate is significantly lower than the standard 0.4% MDR applicable to eligible commercial person-to-merchant (P2M) UPI transactions exceeding Rs 2,000.
Impact on Investors and Market Participants
The direct financial impact on individual investors will largely depend on how various intermediaries, such as brokers and mutual fund platforms, manage this new cost. Should these entities absorb the MDR, investors may experience minimal to no additional expense. However, if the cost is passed on, investors could see a slight increase in expenses for UPI-linked market transactions.
Ashishkumar Chauhan, Managing Director and CEO of the National Stock Exchange (NSE), has indicated that the introduction of MDR might lead to a short-term reduction in trading volumes conducted via UPI. Nevertheless, he anticipates that these volumes will likely stabilize over a longer period. Active traders, who frequently move funds, may be more sensitive to these added costs compared to long-term investors making occasional lump-sum or monthly SIP payments.
Exemptions and Broader Context
Crucially, certain UPI payment types remain exempt from this new MDR. UPI Mandate and AutoPay features, commonly used for recurring payments like Systematic Investment Plans (SIPs), insurance subscriptions, utility bills, and OTT services, will not incur any prescribed MDR. This means automatic monthly SIP debits through UPI Mandates will continue without the new charge.
Authorities have clarified that MDR is a charge within the merchant payment ecosystem, not a direct fee collected by the government or NPCI. Banks have been instructed to ensure that merchants do not transfer these MDR charges directly to customers. Furthermore, UPI application providers are prohibited from imposing their own platform fees or hidden charges.
The government estimates that the new MDR framework will only impact approximately 4% of all merchant transactions, as the majority either fall below the Rs 2,000 threshold or are covered under the zero-MDR person-to-person (P2PM) framework. To support smaller businesses, a dedicated fund, comprising 5% of total MDR collections, will be established to expand UPI acceptance among small merchants.