What Exactly Is Changing?
Starting October 15, 2026, a Merchant Discount Rate (MDR) of 0.4% will be applied to specific person-to-merchant (P2M) UPI payments. The key takeaway for consumers is that this is not a fee you will pay directly; it is a charge levied on the merchant receiving
the payment. The government has clarified that customers will not be charged for making UPI payments. The goal is to create a sustainable revenue model for the payment ecosystem—including banks and payment service providers—that invests heavily in maintaining the vast UPI infrastructure. This change is not a blanket rule for all UPI use; in fact, the vast majority of transactions will remain unaffected.
Your Everyday UPI Use Remains Free
It's crucial to understand what isn't changing. Person-to-person (P2P) transactions, like sending money to friends or family, will remain completely free, regardless of the amount. Furthermore, the new MDR only applies to merchant transactions valued above ₹2,000. Any payment you make to a shop, online store, or service provider for ₹2,000 or less will continue to have zero MDR for the merchant. According to official estimates, this threshold ensures that over 95% of all merchant UPI transactions by volume will not be impacted by the new charge.
Which Transactions Attract the New Fee?
The 0.4% MDR applies specifically to person-to-merchant payments exceeding ₹2,000. For example, a payment of ₹3,000 to an eligible merchant would incur an MDR of ₹12, which is paid by the merchant. To prevent excessive charges on high-value purchases, this fee is capped at ₹300 per transaction. This cap is reached for any payment of ₹75,000 or more. Additionally, small merchants who receive up to ₹1 lakh per month via UPI QR codes will remain fully exempt from this MDR, offering protection to smaller businesses. This ensures that the charge is primarily aimed at larger-scale commercial transactions.
Special Rates for Essential Sectors
The framework also includes special, lower rates for certain essential and thin-margin sectors to minimize their burden. Payments above ₹2,000 for railways, telecommunications, insurance, fuel, and agricultural inputs will attract a flat, concessional MDR of just ₹5 per transaction, rather than the 0.4% rate. Another specific category is capital markets, where payments for mutual funds, securities, and stockbrokers will have a much lower MDR of 0.02%, also capped at ₹300. These tailored rates are designed to ensure cost stability for critical public services and important investment channels.
Will Merchants Pass the Cost to Consumers?
This is the most common concern for consumers. Officially, banks have been advised to ensure merchants do not pass these MDR costs on to customers, and UPI app providers are prohibited from adding any platform fees. However, the reality may be more complex. Some retailer associations have warned that merchants operating on very thin margins might feel the impact and could be tempted to favor cash for larger transactions. While larger businesses are expected to absorb the cost, as they do with credit card fees, there's a possibility that smaller, non-exempt businesses may try to pass the fee on, even if unofficially.
The Rationale: A Sustainable Ecosystem
For years, UPI has operated on a zero-MDR model, supported by government incentives. While this fueled explosive growth, it placed the entire financial burden of operating the system on banks and fintech companies. With transaction volumes soaring, the costs for maintaining and upgrading infrastructure, cybersecurity, and fraud prevention have become substantial. Proponents of the new MDR framework, including the NPCI and RBI, argue that it is a necessary step to make the UPI ecosystem self-sustainable, encourage further innovation, and support its expansion into more rural and semi-urban areas.
