What Exactly Is the New Fee?
Starting October 15, 2026, a Merchant Discount Rate (MDR) of 0.4% will apply to certain UPI payments received by businesses. This is not a fee for customers; it is a charge that merchants will incur for processing specific transactions. The key details
are that this MDR applies only to Person-to-Merchant (P2M) payments valued above ₹2,000. For very large transactions of ₹75,000 or more, the fee is capped at a maximum of ₹300. This is fundamentally different from the zero-MDR regime that has been in place for merchants since 2020. It's also important to distinguish this from an earlier, separate proposal about an 'interchange fee' on wallet-based transactions, which also caused confusion. This new, broader MDR is the key change for businesses to watch now.
Who Is Exempt From This Fee?
The good news for most is that a vast number of transactions and businesses are completely exempt from this new fee. The government and the National Payments Corporation of India (NPCI) have clarified that the framework is designed to protect small businesses and everyday users. Firstly, all Person-to-Person (P2P) transfers remain entirely free, regardless of the amount. Secondly, any merchant transaction up to ₹2,000 is exempt from the MDR. Given that the majority of UPI payments fall below this threshold, officials estimate that about 96% of all merchant transactions will remain unaffected. Furthermore, there is a crucial exemption for small merchants. Those who receive up to ₹1 lakh per month through UPI are not required to pay any MDR, even on individual transactions that exceed ₹2,000.
Why Introduce a Fee Now?
The introduction of a structured MDR is a strategic move to ensure the long-term financial health of the UPI ecosystem. Running a massive, real-time payments network that processes billions of transactions requires significant investment in technology, servers, cybersecurity, and continuous innovation. For years, banks and payment service providers have borne these operational costs, supported by government incentives. The zero-MDR model, while successful in driving adoption, was not seen as sustainable indefinitely. The new fee structure creates a revenue stream that gets distributed among the ecosystem players—like banks and payment app providers—to help them cover their costs and continue investing in the network's expansion and security. The government has clarified that this MDR is not a tax and is not collected by the government or NPCI.
What This Means for Your Business
The impact on your business depends entirely on your size and transaction patterns. For millions of small kirana stores, street vendors, and service providers whose individual transactions are typically below ₹2,000 or whose total monthly UPI collections are under ₹1 lakh, nothing changes. However, for mid-sized to larger businesses that regularly process UPI payments over ₹2,000—such as electronics stores, travel agencies, or large retailers—this MDR will become a new operational cost. A ₹10,000 payment would incur a ₹40 fee, for example. While merchants have been advised not to pass this cost on to customers, it will inevitably feature in their financial planning. The rate of 0.4% is still considerably lower than the MDR on most credit card (1.5%-2.5%) and debit card (up to 0.9%) transactions, keeping UPI a highly cost-effective digital option.
