What Is Merchant Discount Rate? All About New UPI Charge Set To Take Effect From October 15

UPI transactions are set to undergo a change from October 15, with a Merchant Discount Rate (MDR) being introduced for certain payments made to businesses. The new framework will impose an MDR of 0.4% on person-to-merchant (P2M) UPI transactions above Rs 2,000, as per the latest notification from NPCI.

What Is Merchant Discount Rate?

MDR is a processing fee charged on digital payments accepted by merchants. It is calculated as a percentage of the transaction value and is normally deducted from the amount received by the merchant. The fee is subsequently distributed among participants involved in processing the payment, including banks and UPI app providers.

Under the new framework, the 0.4% rate will have a maximum limit of Rs 300 for eligible

merchant payments of Rs 75,000 or more. However, the new charge will not apply to person-to-person (P2P) transfers, which will remain free regardless of the amount sent.

The government has also created separate rates for specific categories. Payments above Rs 2,000 in sectors such as railways, telecom, insurance, fuel and agricultural inputs will attract a flat Rs 5 MDR. Transactions involving mutual funds, securities, stockbrokers and dealers will carry a 0.02% MDR, capped at Rs 300.

Small vendors covered under the P2PM framework will continue to be exempt from MDR.

Why Is MDR Being Introduced?

UPI merchant payments have traditionally operated without a transaction fee, with the government supporting the digital-payments ecosystem through incentive schemes. The new framework seeks to create a revenue stream for the payment ecosystem while continuing to keep UPI free for consumers.

The Finance Ministry said, “Data analysis indicates that only 4 percentage of merchant transactions will be impacted by the MDR introduction, as the majority of transactions fall below the ₹2,000 threshold or qualify under the zero-MDR P2PM framework. This ensures that micro and small businesses remain shielded from cost burdens.”

Banks have also been advised not to allow merchants to pass the MDR cost on to customers.