What Is This New UPI Charge?
Starting October 15, 2026, the National Payments Corporation of India (NPCI) has introduced a fee called the Merchant Discount Rate (MDR) on certain UPI transactions. This is not a fee for customers. Instead, it's a charge that merchants pay for payment
processing services. The standard rate is 0.4% and it applies only to person-to-merchant (P2M) payments exceeding ₹2,000. Person-to-person (P2P) transfers, like sending money to a friend or family member, remain completely free, regardless of the amount. This new rule is designed to affect a small fraction of overall UPI payments, specifically larger commercial sales.
Who Actually Pays the Fee?
The MDR is paid by the merchant receiving the payment. It's a cost of doing business, similar to fees associated with accepting credit or debit cards. The fee is collected and shared among the various players that keep the UPI system running, such as the banks, payment service providers, and app developers. The government and NPCI have been clear that merchants are not supposed to pass this cost on to customers as a separate charge. While this MDR adds a cost for businesses, it remains significantly lower than the typical 1.5% to 2.5% fee for credit card transactions, making UPI an affordable option for digital payments.
Why Was This Fee Introduced?
For years, the UPI ecosystem operated on a zero-fee model for merchants, which was subsidised by the government to drive adoption. With UPI processing trillions of rupees in transactions annually, the costs of maintaining and upgrading the infrastructure, ensuring cybersecurity, and preventing fraud have grown substantially. The government's subsidies were no longer sufficient to cover these operational costs. Introducing a nominal MDR on higher-value commercial transactions creates a sustainable revenue stream for the ecosystem. This ensures that payment providers can continue to invest in making the network more robust, secure, and reliable for everyone.
The ₹300 Cap Explained
The ₹300 cap is a crucial safeguard for businesses that deal with very high-value transactions. The 0.4% fee is calculated on the transaction amount, but only up to a point. For any transaction of ₹75,000, the 0.4% MDR comes out to exactly ₹300. For any payment amount above ₹75,000, the fee is capped at a flat ₹300. For example, on a transaction of ₹1,00,000, the fee is not ₹400 (0.4% of 1 lakh) but is limited to ₹300. This cap protects merchants from excessively high fees on large sales, ensuring predictability in their payment processing costs.
Are All Merchants Affected?
No, there are several important exemptions. The MDR does not apply to any transaction under ₹2,000, which covers the vast majority of daily UPI payments. Furthermore, small merchants who receive up to ₹1 lakh per month via UPI QR codes will remain completely exempt from any MDR, protecting the smallest businesses. The Ministry of Finance estimates that only about 4% of all merchant transactions will be impacted by this new charge. Certain essential sectors like railways, telecom, fuel, and insurance have a lower, flat MDR of just ₹5 for transactions over ₹2,000. Capital market transactions, such as for mutual funds or stockbrokers, have an even lower rate of 0.02%, also capped at ₹300.
Potential Impact on Businesses
For the small percentage of merchants who process a high volume of large-ticket UPI payments, this new cost could be a concern. Businesses operating on very thin margins, like in retail or FMCG distribution, might see a noticeable impact on their profitability if they absorb the full 0.4% fee. A recent survey indicated that many merchants are unwilling to absorb this cost, which could lead them to encourage customers to use other payment methods like cash or NEFT for larger amounts. However, for most businesses, especially small and medium enterprises, the impact is expected to be minimal given the exemptions for small-value transactions and low-volume merchants.
