What Are These New Charges?
The National Payments Corporation of India (NPCI) has introduced a new fee called the Merchant Discount Rate (MDR) that will apply to certain UPI transactions from October 15, 2026. Specifically, a charge of 0.4% will be levied on person-to-merchant (P2M)
payments that are over ₹2,000. It's crucial to understand that this is not a new transaction limit; you can still make payments larger than ₹2,000. This fee only applies when a customer pays a business for goods or services. For very large transactions, the fee is capped at ₹300 for any payment of ₹75,000 or more.
Who Actually Pays This Fee?
This is the most important point of clarification: customers do not pay this fee. The MDR is charged to the merchant who receives the payment. Government sources and NPCI have been clear that merchants are not supposed to pass this cost on to consumers by adding it as a surcharge to their bills. So, if you buy an item for ₹5,000 and pay via UPI, you will only pay ₹5,000. The merchant, however, will receive that amount minus the 0.4% MDR, which would be a ₹20 fee in this example. This fee is then distributed among the various entities that keep the UPI ecosystem running, such as banks and payment service providers.
Are All UPI Payments and Merchants Affected?
No, the new charge is quite specific. Person-to-person (P2P) transactions, like sending money to friends or family, remain completely free, regardless of the amount. Furthermore, all UPI merchant payments up to ₹2,000 are also exempt from this fee. Small merchants are also protected; those with monthly UPI collections up to ₹1 lakh will not have to pay the MDR. This exemption covers a vast majority of small shops and vendors. Additionally, certain essential sectors like fuel, railways, telecommunications, and insurance have a much lower flat fee of ₹5 for transactions over ₹2,000 instead of the 0.4% rate.
Why Was This Change Introduced?
For years, UPI has operated on a zero-MDR model, which was instrumental in its massive adoption across India. However, maintaining and scaling the vast infrastructure required for billions of transactions—including servers, cybersecurity, and customer support—comes at a significant cost. The introduction of a nominal MDR on higher-value merchant transactions is designed to create a sustainable revenue model for the banks and payment companies that have invested heavily in building and maintaining the UPI network. It aims to ensure the long-term health and continued innovation within the digital payments ecosystem without burdening the average consumer.
How This Could Affect Your Larger Purchases
While you won't be directly charged, the new MDR could have indirect effects. The primary concern is whether merchants will absorb this new cost or try to recover it in other ways. Although they are not supposed to charge customers extra for using UPI, some businesses might subtly increase their product prices over time to compensate for the fee on high-value transactions. Another possibility is that some merchants might start discouraging UPI payments for larger amounts and prefer other methods like cash or bank transfers. A recent survey indicated that if merchants were to pass on the cost, a significant number of consumers might switch back to cash or cards for larger purchases. For now, the directive is clear that merchants should bear the cost, but the long-term market behaviour remains to be seen.
