First, What Is This MDR?
MDR, or Merchant Discount Rate, is a fee that a merchant pays to their bank and payment service provider for processing a digital payment. Think of it as a service charge for ensuring the transaction goes through smoothly and securely. This fee helps
maintain the vast infrastructure behind digital payments, from servers to support staff. For a long time, card payments have had an MDR, typically ranging from 0.9% for debit cards to over 2% for credit cards. However, since January 2020, UPI transactions in India have operated under a zero-MDR regime to encourage digital adoption.
What Is Changing with UPI?
Starting October 15, 2026, the zero-MDR rule for UPI is being partially rolled back. The National Payments Corporation of India (NPCI) has announced that a 0.4% MDR will be applied to person-to-merchant (P2M) UPI transactions above ₹2,000. For very large transactions of ₹75,000 or more, this fee is capped at a maximum of ₹300. It's crucial to understand this fee is paid by the merchant, not the customer. The money collected is distributed among the payment ecosystem partners, like banks and payment apps, to help keep the UPI system running and expanding.
Will This Affect All My UPI Payments?
No, the vast majority of transactions will remain completely free. The government and NPCI have been clear on this. The new MDR only applies to merchant payments over ₹2,000. All person-to-person (P2P) transfers, like sending money to a friend or family member, remain free regardless of the amount. Furthermore, all merchant transactions up to ₹2,000 are exempt from this charge. Since over 95% of UPI merchant payments fall below this threshold, most of your daily payments—for groceries, chai, or auto rides—will not be affected.
Are All Merchants Subject to This Fee?
Not all merchants will have to pay the new MDR. Small vendors, such as local kirana stores or street vendors who receive up to ₹1 lakh per month via UPI, will continue to enjoy zero MDR on all transactions, even those above ₹2,000. This is designed to protect small businesses from increased costs. The MDR applies to larger merchants who cross this monthly threshold. Additionally, certain essential sectors like fuel, insurance, and telecom will have a lower, flat MDR instead of the 0.4% rate.
Can a Shopkeeper Ask Me to Pay This Fee?
This is the core of the issue: absolutely not. The directive from the NPCI and the government is firm that merchants are forbidden from passing this MDR charge on to customers. You should only pay the listed price of the goods or services. If a shopkeeper asks you to pay an extra 0.4% or any other 'UPI charge', they are violating the rules. The government is reportedly setting up a monitoring system to ensure compliance and prevent this from happening. Critics, however, worry that some merchants might try to pass the cost on informally, just as some do with credit card fees.
What Should I Do If I'm Asked to Pay Extra?
As a customer, you are not liable for the merchant's MDR. If a merchant insists on an extra charge for using UPI for a payment over ₹2,000, you have the right to refuse to pay the extra amount. The transaction should be for the bill amount only. While it can be an awkward situation, especially with a small business owner, the rules are on your side. If this happens, you can report the incident to your bank or the UPI app you used for the transaction. These platforms have grievance redressal mechanisms to handle such complaints. The clear guideline is that the cost of accepting digital payments is a business expense for the merchant, not a surcharge for the customer.
