The Big Question: Are UPI Payments Still Free?
Yes, for the vast majority of users and transactions, UPI remains completely free. If you are sending money to a friend or family member (a person-to-person, or P2P, transaction), there are no new charges, regardless of the amount. For shoppers, this
means your daily UPI payments for groceries, tea, or any purchase up to ₹2,000 will continue to be free. The change specifically targets certain merchant transactions above this ₹2,000 threshold and is not a fee charged to customers.
So What Is The New Rule?
Starting October 15, 2026, a fee called the Merchant Discount Rate (MDR) will be applied to some person-to-merchant (P2M) UPI payments over ₹2,000. This MDR is set at 0.4% of the transaction value. It's important to understand this is a fee paid by the merchant's bank or payment processor, not directly by the customer making the payment. For example, on a ₹3,000 purchase, the merchant's payment provider would pay a ₹12 fee within the ecosystem. The customer still only pays ₹3,000. For very large transactions of ₹75,000 or more, this fee is capped at a maximum of ₹300.
Which Merchants Are Affected?
Not all merchants will be impacted. The rule is designed to protect small businesses. Merchants who receive less than ₹1 lakh per month through UPI QR code payments are exempt from this MDR. This means the vast majority of small kirana stores, street vendors, and local shops will not have to pay the new fee, even on transactions over ₹2,000. The charge primarily applies to larger, more established businesses that process a higher value of digital payments. Government data suggests that only about 4% of all merchant transactions will be affected by this new rule.
A Key Distinction: Bank vs. Wallet Payments
The new 0.4% MDR framework applies to UPI transactions made from a bank account. This is a separate issue from a previously discussed 1.1% interchange fee, which applies specifically to transactions over ₹2,000 made from Prepaid Payment Instruments (PPIs) like digital wallets. A PPI is an account where you load money beforehand, such as a Paytm or PhonePe wallet. For a regular user paying directly from their linked bank account via a UPI app, the 0.4% MDR framework is the relevant one, and again, this cost is borne by the merchant's side of the payment system.
Why Is This Change Happening?
The UPI system has seen explosive growth, processing billions of transactions monthly. Maintaining this massive infrastructure—including servers, cybersecurity, and customer support—requires significant investment. Until now, the system has operated largely without a revenue model for the payment service providers. Introducing a modest MDR on a small fraction of high-value merchant transactions is intended to make the UPI ecosystem self-sustainable. The revenue helps cover operational costs and encourages further innovation and expansion of digital payments into rural and semi-urban areas.
What Shoppers and Merchants Should Do
For shoppers, nothing changes. You can continue to use UPI for all payments without fear of being charged extra. The government has clarified that merchants are not supposed to pass this MDR cost on to customers. For merchants, if you are a small business owner with monthly UPI collections under ₹1 lakh, you likely don't need to do anything, as you are exempt. Larger merchants should check with their payment service provider or bank to understand how the MDR will be handled in their statements. Special, lower rates apply for specific sectors like fuel, railways, and insurance.
