The Big Question: Are Your UPI Payments Still Free?
Let's clear this up immediately: for the vast majority of people, UPI payments will remain completely free. Sending money to friends and family (person-to-person or P2P) is still free, regardless of the amount. Paying a shopkeeper for your daily groceries
or coffee, as long as the transaction is ₹2,000 or less, also remains free of any new charges for you, the customer. The government and the National Payments Corporation of India (NPCI) have been firm that everyday consumer transactions should not be burdened with fees.
So, What Is the New Charge Everyone Is Talking About?
The change, effective October 15, 2026, is the introduction of a Merchant Discount Rate (MDR) on certain transactions. This is not a fee on customers. It is a fee that merchants must pay for processing some digital payments. Specifically, a 0.4% MDR will apply to person-to-merchant (P2M) UPI payments that are valued above ₹2,000. This fee is intended to help banks and payment companies cover the costs of maintaining the vast UPI infrastructure, including cybersecurity and innovation.
Understanding the Thresholds and Caps
The new fee structure is quite specific. The 0.4% MDR only kicks in on eligible merchant payments over ₹2,000. For example, on a transaction of ₹3,000, the merchant would pay an MDR of ₹12. To prevent excessive charges on large transactions, this fee is capped. For any payment of ₹75,000 or more, the maximum MDR a merchant has to pay is ₹300. The government's goal is to ensure the system is sustainable without heavily impacting businesses or their customers. The Finance Ministry has also explicitly told banks to ensure merchants do not pass this cost on to consumers.
Not All Merchants Are the Same: The Exemptions
A crucial part of this new framework is the number of exemptions. Small merchants are a key focus. Any merchant who receives up to ₹1 lakh per month through UPI QR code payments is exempt from this MDR, even if they receive an individual payment over ₹2,000. This protects millions of small shopkeepers and vendors across the country. Data from NPCI suggests that over 95% of all merchant transactions are below the ₹2,000 threshold anyway, meaning they are unaffected by this new rule.
Special Rates for Essential Services
The rules also acknowledge that a standard percentage fee isn't suitable for all sectors. For critical and thin-margin categories like railways, telecom services, fuel, insurance, and utilities, a different rule applies. For payments over ₹2,000 in these sectors, merchants will pay a flat fee of just ₹5, instead of the 0.4% rate. This ensures that costs for essential services do not escalate due to payment processing fees.
What About Wallet Payments? A Quick Refresher
It is important not to confuse the new MDR with the existing interchange fee on wallet transactions. For some time now, an interchange fee (of up to 1.1%) has been applicable on UPI payments made from a Prepaid Payment Instrument (PPI), like a digital wallet balance, for transactions over ₹2,000. This fee is part of the background mechanics between wallet companies and banks. The new 0.4% MDR is for payments made directly from a bank account to a merchant's account and is a separate framework. For the average user paying via their linked bank account, this wallet fee is not relevant.
