The National Payments Corporation of India (NPCI) has introduced a revised merchant discount rate (MDR) framework for select unified payments interface (UPI) transactions, bringing a charge on certain merchant payments above ₹2,000 while keeping UPI completely free for consumers. Under it, a 0.4% MDR will apply to specified person-to-merchant (P2M) UPI transactions above ₹2,000, subject to a cap of ₹300 per transaction. The new framework will take effect from 15 October 2026.
The move marks a significant change in the economics of UPI, which has so far operated without a conventional MDR on most transactions. Reserve Bank of India (RBI) described the introduction of MDR on large-value UPI transactions as an important step towards the long-term sustainability of India's digital payments ecosystem.
Importantly, the framework does not introduce a transaction fee for UPI users. Person-to-person (P2P) payments will remain free regardless of the amount transferred, while P2M transactions of up to ₹2,000 will continue to attract zero MDR.
In a post on X, the Union ministry of finance (MoF) said around 96% of all P2M transactions will remain unaffected by the new framework, either because they fall below the ₹2,000 threshold or are covered by the zero-MDR provisions for small merchants.
What Will Attract MDR
The standard MDR under the revised framework will be 0.4% for specified P2M transactions above ₹2,000. For transactions of ₹75,000 and above, the MDR will be capped at ₹300 per transaction.
This means, for example, that a qualifying merchant transaction of ₹10,000 would carry an MDR of ₹40, while a transaction of ₹1 lakh would not attract more than ₹300 under the cap.
The framework also creates different rates for specific sectors.
UPI payments above ₹2,000 in essential and thin-margin categories such as railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat MDR of ₹5 per transaction.
Capital market-related payments, including transactions involving mutual funds, securities, stockbrokers and dealers, will be subject to an MDR of 0.02%, with the charge capped at ₹300 per transaction.
The differentiated rates are intended to account for the nature and margins of various merchant categories rather than applying a uniform charge across all higher-value UPI payments.
Consumers Will Continue To Use UPI Free of Charge
A key feature of the new framework, according to the government, is the separation between MDR and any charge imposed on the payer.
MoF clarified that MDR is a fee within the merchant payment ecosystem and is not a tax or a charge collected by the government or NPCI. The amount is distributed among participants in the payment chain, including banks, payment service-providers and UPI application-providers.
Banks have been advised to ensure that merchants do not pass MDR on to customers. UPI application providers will also be prohibited from imposing platform fees or hidden charges on users, according to the government's framework.
There will be no monthly quota or tiered limit on free UPI usage for individuals.
Daily transaction limits set by banks and NPCI will continue to operate as security and risk-management measures. These limits, which can generally range from ₹1 lakh to ₹5 lakh depending on the transaction category, should not be confused with the ₹2,000 MDR threshold.
In other words, a consumer making a UPI payment of ₹20,000 does not automatically become liable to pay a transaction charge. The MDR applies to specified merchant transactions and remains a merchant-side fee.
P2P Transactions Remain Outside the MDR Framework
The government has made a clear distinction between P2P and P2M payments. All P2P UPI transactions will remain free, irrespective of the amount. According to MoF, P2P transactions account for around 70% of total UPI transaction value and will remain completely outside the MDR framework.
For merchant payments, the ₹2,000 threshold becomes the key dividing line. P2M transactions up to that amount will remain free, while specified transactions above it can attract MDR.
Small merchants will receive an additional exemption. Businesses operating under the person-to-person-merchant (P2PM) framework and receiving up to ₹1 lakh a month through UPI QR payments directly into their bank accounts will continue to receive zero-MDR treatment.
The provision is aimed at protecting small vendors, neighbourhood shops and other micro businesses from an additional payment cost.
Around 96% of Merchant Transactions Unaffected: Govt
The government estimates that MDR will apply to only around 4% of merchant transactions. As a result, about 96% of P2M transactions will continue without MDR.
NPCI has separately said that more than 95% of low-value P2M UPI transactions, involving payments of up to ₹2,000, will remain outside the MDR framework.
The two figures refer to slightly different measures, but point to the same broad structure: the new MDR regime is aimed at a relatively limited segment of merchant payments rather than the entire UPI network.
This is significant for India's large base of small-value digital transactions, where UPI has become a routine payment method for consumers and merchants.
MDR Revenue To Fund Payment Ecosystem
RBI said the new arrangement would support continued investment in technology, infrastructure and payment acceptance networks.
In
a post on X, the central bank said an appropriate distribution of MDR among ecosystem participants would help support investments needed to allow UPI to continue scaling and expanding its reach.
The additional revenue is expected to support areas including payment infrastructure, resilience, cybersecurity and innovation. NPCI has also proposed a dedicated fund to expand UPI acceptance among small merchants, particularly through existing merchant networks and in tier-3 and smaller markets.
Under the framework, an amount equivalent to 5% of total MDR collections will be contributed to this fund.
The objective is to encourage wider acceptance and sustained use of digital payments among small businesses that may otherwise have limited access to formal payment infrastructure.
Why the Change Matters
The introduction of MDR addresses one of the central challenges in the UPI model: how to sustain the infrastructure supporting a rapidly growing payment system while keeping payments free for users.
The government said the framework was introduced under the Payment and Settlement Systems Act, 2007, following deliberations by the UPI steering committee on rates, operational arrangements and consumer safeguards.
The finance ministry also cited the standing committee on finance's 32nd report, which had emphasised the importance of creating a viable revenue model for the digital payments’ ecosystem.
RBI's position is that MDR on larger merchant transactions can help UPI continue to scale, invest in technology and infrastructure and expand acceptance, while the government's framework seeks to ring-fence individuals and small merchants from additional costs.
For merchants outside the exemptions, however, 15 October 2026 will mark the beginning of a new cost structure for qualifying higher-value UPI payments.
The change, therefore, does not amount to a blanket UPI charge. Instead, it creates a selective MDR regime for specified merchant transactions above ₹2,000, while preserving free P2P payments, free low-value merchant transactions and zero MDR for eligible small merchants.
The immediate impact on consumers is consequently limited: UPI remains free at the point of use, but the payment ecosystem will now begin recovering part of its costs from a defined segment of larger merchant transactions.
You may want to see the frequently asked questions (FAQs) on new MDR charges by NCPI.
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