The Core Change: What's New?
The National Payments Corporation of India (NPCI) has introduced a new fee, known as the Merchant Discount Rate (MDR), on certain UPI transactions. Effective October 15, 2026, a 0.4% MDR will apply to specific Person-to-Merchant (P2M) payments valued
above ₹2,000. For very large transactions of ₹75,000 or more, this fee is capped at ₹300. This move has triggered a wave of questions, but the key detail lies in which specific transactions are affected. The change does not apply to all UPI payments but targets a particular segment to help sustain the payment ecosystem.
Will Shoppers Have to Pay for UPI?
The short and most important answer is no. For the average user, UPI remains completely free. The government and NPCI have explicitly stated that customers will not be charged for making UPI payments. All Person-to-Person (P2P) transfers—like sending money to friends or family—are unaffected, regardless of the amount. Similarly, scanning a QR code to pay a merchant for amounts up to ₹2,000 remains free. Banks and UPI apps are prohibited from passing these new MDR charges on to customers. The fee is designed as a backend charge within the system, not a consumer-facing one.
So, Who Actually Pays This Fee?
The new MDR is a merchant-side cost, but only for a specific type of transaction: those made via Prepaid Payment Instruments (PPIs) like digital wallets. When a customer pays a merchant over ₹2,000 using a UPI-linked wallet (like a Paytm or PhonePe wallet balance), the merchant is liable for the 0.4% MDR. This fee is deducted from the final amount settled with the merchant. Standard bank-to-bank UPI transfers do not attract this fee. The revenue generated is shared among the payment ecosystem participants—like banks and payment app providers—who incur costs to operate the UPI infrastructure.
Why Was This Fee Introduced?
For years, India has maintained a zero-MDR policy on UPI to drive mass adoption, a strategy that has been incredibly successful. However, this has meant that the banks and payment companies running the vast UPI network did so without a direct revenue stream from transactions, relying on government incentives. Industry bodies have long argued that this model was not sustainable in the long run. The introduction of a targeted MDR on higher-value PPI merchant transactions is an attempt to create a self-sustaining financial model for the UPI ecosystem, encouraging continued investment in technology, security, and expansion without burdening consumers.
How Does This Affect Merchants?
The impact on merchants varies significantly. Large and medium-sized businesses accepting UPI wallet payments over ₹2,000 will now see the 0.4% MDR deducted from their settlements. However, the government has built in protections for small businesses. Small merchants who receive up to ₹1 lakh per month via UPI QR codes are exempt from this MDR. It's estimated that over 95% of all UPI merchant transactions fall below the ₹2,000 threshold and will remain free. While merchants are officially not supposed to pass the cost to consumers, some analysts worry that businesses may try to factor it into their prices or, in some cases, encourage cash payments for larger amounts.
