What Is the New Fee?
Starting October 15, 2026, the National Payments Corporation of India (NPCI) is introducing a Merchant Discount Rate (MDR) on certain UPI transactions. Think of an MDR as a processing fee that merchants pay to payment service providers for facilitating
digital transactions. The standard rate for this new fee will be 0.4% on specific merchant payments valued over ₹2,000. For very large transactions, this fee is capped at ₹300. For example, a merchant receiving an eligible UPI payment of ₹5,000 would incur a fee of ₹20. This is not a new tax, but a charge within the payments ecosystem itself.
Crucially, Who Pays This Fee?
This is the most important point: customers will not pay this fee. The government and NPCI have clarified that UPI remains free for individuals making payments. The MDR is charged to the merchant receiving the payment. All person-to-person (P2P) transfers, like sending money to friends or family, remain completely free, regardless of the amount. The change only applies to some person-to-merchant (P2P M) transactions. So, whether you send ₹500 or ₹50,000 to another person, the transaction is still free.
Which Transactions Are Actually Affected?
Not all merchant payments over ₹2,000 are affected. The new MDR primarily applies to payments made via Prepaid Payment Instruments (PPIs). PPIs are digital wallets where you store money, such as Paytm Wallet, PhonePe Wallet, and others. If you pay a merchant over ₹2,000 directly from your bank account via UPI, there is no charge for you or the merchant. The 1.1% fee is levied when the payment is made from a wallet to the merchant. Furthermore, many transactions and merchants are exempt. All UPI payments to merchants up to the ₹2,000 threshold remain free of any MDR.
Who Is Exempt From the Fee?
The framework includes significant exemptions to protect small businesses and essential services. Small merchants receiving up to ₹1 lakh per month via UPI QR code payments will continue to have zero MDR. According to the Finance Ministry, about 96% of all merchant transactions will remain unaffected by this change. Additionally, certain sectors have special, lower rates. For transactions over ₹2,000, industries like railways, telecommunications, insurance, and fuel will attract a flat fee of just ₹5. Capital market payments have an even lower rate of 0.02%.
Why Is This Change Happening?
For years, UPI has operated largely without fees for merchants, which helped drive its incredible adoption across India. However, maintaining and scaling this massive infrastructure—which processed over 24,000 crore transactions in 2025-26—is expensive. Banks, wallet providers, and payment apps incur costs related to servers, cybersecurity, and customer support. The RBI and NPCI view this structured MDR as a necessary step for the long-term financial sustainability of the digital payments ecosystem. By creating a revenue stream for payment service providers, the fee helps ensure they can continue to invest in technology and security, ultimately benefiting both consumers and businesses.
What Is the Potential Impact?
While customers are protected, the new cost for merchants has sparked debate. The Retailers Association of India (RAI) has expressed concern that merchants operating on thin margins might be discouraged from accepting digital payments for larger amounts. There's a worry it could push some small businesses back towards cash transactions, especially ahead of the festive season. However, the government has stated it will monitor the situation to ensure merchants do not pass the cost on to consumers. The exemptions for small merchants are designed to mitigate this risk and maintain the momentum of digital adoption.
