The Unified Payments Interface (UPI) is set to undergo a significant change with the introduction of a Merchant Discount Rate (MDR) on certain Person-to-Merchant (P2M) transactions. Effective October 15, 2026, transactions above ₹2,000 will attract an MDR of 0.4%, as announced by the National Payments Corporation of India (NPCI).
Understanding the New UPI Merchant Fees
Under the new framework, merchants receiving payments through UPI will incur a fee for transactions surpassing the ₹2,000 threshold. For instance, a payment of ₹3,000 will result in a ₹12 MDR (0.4%). Similarly, a ₹50,000 transaction will lead to a ₹200 charge.
A crucial aspect of these new UPI merchant fees is the cap placed on high-value transactions. Any P2M payment of ₹75,000 or more will be subject to a maximum MDR of ₹300, irrespective of the transaction value. This means a ₹1 lakh payment, which would ordinarily incur ₹400 at the 0.4% rate, will only be charged ₹300.
Who Pays and Who is Exempt?
- Consumers: Individuals using UPI for payments will continue to enjoy free transactions. The MDR is a charge levied solely on merchants, and UPI applications are prohibited from imposing any platform fees on consumers.
- Person-to-Person (P2P) Transactions: Sending money to friends, family, or splitting bills will remain free of any charges.
- Small Merchants (P2PM): Small vendors operating under the Person-to-Person-Merchant (P2PM) framework are exempt from the MDR. This category includes merchants who receive up to ₹1 lakh per month through UPI QR codes directly into their accounts. Even if an individual payment exceeds ₹2,000, these merchants will not be liable for MDR as long as they qualify under the P2PM exemption. Acquiring banks will monitor transaction activity, transitioning merchants to the P2M category if they consistently receive over ₹1 lakh monthly for three consecutive months.
Special Rates for Specific Sectors
To accommodate various industries, the NPCI has outlined concessional MDR rates for specific sectors:
- Fixed ₹5 MDR: Categories such as railways, telecom, insurance, fuel, and utility payments will incur a flat ₹5 MDR for transactions exceeding ₹2,000, instead of the standard 0.4%.
- Capital Market Transactions: Payments related to mutual funds, securities, stockbrokers, and dealers will attract an MDR of 0.02%, capped at ₹300 per transaction.
Why the Change? NPCI's Rationale
The NPCI states that the introduction of MDR is essential to establish a sustainable funding model for the rapidly expanding UPI ecosystem. With UPI processing billions of transactions monthly, significant investment is required for infrastructure resilience, cybersecurity, fraud prevention, innovation, and customer service. The new framework aims to provide a predictable revenue stream, reducing reliance on annual government incentives.
Furthermore, a dedicated fund is proposed to support merchant onboarding and digital payment infrastructure, particularly in Tier 3-6 centers and regions like the Northeast, Jammu & Kashmir, and Ladakh. The detailed framework for this fund is expected to be finalized in consultation with the Reserve Bank of India.
Importantly, merchants are explicitly prohibited from directly passing on the MDR charges to customers, ensuring that consumers continue to pay the displayed price for goods and services.