The Big Question: Are UPI Payments Still Free for Merchants?
The short answer is yes, for the most part. The long answer is more nuanced and depends on the transaction value and the type of merchant. From October 15, 2026, a new framework introduces a Merchant Discount Rate (MDR) on some, but not all, person-to-merchant
(P2M) UPI transactions. It's crucial to understand that this charge is for the merchant to bear; it cannot be passed on to the customer. Customers will continue to pay only the listed price for goods and services, and person-to-person (P2P) transfers remain completely free for everyone.
Understanding Merchant Discount Rate (MDR)
Merchant Discount Rate, or MDR, is a fee that a merchant pays to their bank and payment service provider for processing digital transactions. Think of it as a service charge for maintaining the vast, secure infrastructure that makes instant payments possible—from the banks and payment apps to the servers and cybersecurity systems. For years, the government subsidised these costs to drive UPI adoption. The introduction of a selective MDR is seen as a move to make the UPI ecosystem financially self-sustaining without burdening most users or small businesses.
When Does a UPI Charge Apply?
The new charge specifically targets larger commercial transactions. A 0.4% MDR will be applied to P2M UPI transactions that are above ₹2,000. Any payment of ₹2,000 or less remains free of charge for the merchant. The National Payments Corporation of India (NPCI) estimates that this change will not affect around 96% of all merchant UPI transactions, as they fall below this threshold. For very large transactions, the MDR is capped at a maximum of ₹300 for payments of ₹75,000 and above. For example, on a ₹1,00,000 transaction, the charge will be the flat ₹300 cap, not ₹400 (0.4% of the value).
Who is Exempt from These Charges?
The framework has been designed to protect small businesses. Small merchants who are classified under the Person-to-Person Merchant (P2PM) category are exempt from MDR. This typically includes vendors receiving up to ₹1 lakh per month through UPI QR codes into their personal bank accounts. For these merchants, even a single payment above ₹2,000 will not attract a charge; their exemption is based on their category, not the transaction amount. Furthermore, all person-to-person payments, like sending money to family or splitting a bill with friends, remain entirely free.
Are There Special Rates for Certain Industries?
Yes, the NPCI has recognised that a standard percentage-based fee isn't suitable for all sectors. For certain essential services and low-margin businesses, a flat fee is applied instead of the 0.4% rate for transactions above ₹2,000. This includes key categories like railways, telecom, insurance, fuel, and public utilities (such as electricity and water bills), which will attract a fixed MDR of just ₹5 per transaction. Additionally, to encourage investment, transactions related to capital markets, like payments for mutual funds or to stockbrokers, will have a much lower MDR of 0.02%, still capped at ₹300.
What This Means for Your Business
For retailers and digital-first businesses, this change requires a review of payment processing costs. While the vast majority of daily transactions may remain free, businesses that frequently handle high-value sales above ₹2,000 will start seeing this new MDR cost on their statements from October 15, 2026. For example, a furniture store selling an item for ₹50,000 via UPI will now incur a ₹200 fee. It's important to remember that official guidelines prohibit passing this fee directly to the customer as a 'UPI surcharge'. Instead, businesses will need to absorb this cost as a part of their operational expenses, similar to how they handle MDR for card payments, which remain significantly more expensive than the new UPI rate.
