The Indian government has announced significant clarifications regarding Unified Payments Interface (UPI) transaction charges, aiming to ensure the financial sustainability of the digital payment ecosystem while keeping most transactions free for consumers. Under the new framework, person-to-person (P2P) UPI transactions will continue to incur no charges, irrespective of their value. However, a 0.4% Merchant Discount Rate (MDR) will be applicable to select high-value person-to-merchant (P2M) payments exceeding ₹2,000, coming into effect from October 15.
P2P Transactions Remain Free for All Users
A core principle of UPI, facilitating free transfers between individuals, remains unchanged. All P2P UPI transactions will continue to be entirely free of charge, regardless of the amount transferred. This covers a substantial portion of UPI usage, as P2P payments account for approximately 37% of transaction volume and 70% of total value within the UPI ecosystem.
Merchant Discount Rate (MDR) for High-Value P2M Payments
The new 0.4% MDR will specifically target P2M transactions where the payment value surpasses ₹2,000. This charge will be shared among various participants in the payments ecosystem, including banks and UPI application providers, contributing to the operational costs and infrastructure development.
- General MDR: 0.4% for P2M transactions above ₹2,000.
- High-Value Cap: For P2M transactions amounting to ₹75,000 or more, the MDR will be capped at ₹300 per transaction. This ensures that the percentage-based charge does not become disproportionately high for very large payments.
Special Rates for Essential Services and Capital Markets
Recognizing the unique needs of certain sectors, the framework introduces special, reduced MDR rates:
- Essential Services: Transactions above ₹2,000 for railways, telecom, insurance, fuel, and agriculture inputs will attract a flat MDR of ₹5 per transaction. These categories represent a significant portion of P2M transactions and benefit from predictable costs.
- Capital Market Payments: A much lower MDR of 0.02%, capped at ₹300, will apply to payments for mutual funds, securities, stock brokers, and dealers. This move is designed to encourage broader retail participation in formal financial markets by keeping transaction costs minimal.
Protecting Small Merchants and Consumers
The government has also emphasized measures to protect small businesses and end-users from the impact of these changes. Small merchants receiving up to ₹1 lakh per month through UPI QR code payments will continue to enjoy mandatory zero MDR on all their transactions. This provision aims to support micro and informal businesses as they transition towards digital payment methods.
For consumers, UPI app providers are explicitly prohibited from levying any platform fees or hidden charges. Furthermore, banks have been advised to ensure that merchants do not pass on the MDR costs directly to customers making UPI payments via UPI.
Estimated Impact and Sustainability Goals
The government estimates that the introduction of MDR will affect only about 4% of all merchant transactions, as the majority either fall below the ₹2,000 threshold or are covered under the zero-MDR framework for small merchants. To further bolster UPI adoption among smaller businesses, particularly in rural and semi-urban areas, 5% of the total MDR collections will be allocated to a dedicated support fund.
This revised framework is designed to make the UPI ecosystem more financially sustainable in the long term, aligning with recommendations from financial committees that called for a viable revenue mechanism. The overarching goal is to maintain the accessibility and affordability of digital payments for the vast majority of users while ensuring the continued growth and innovation of the UPI platform.