What Is the 'New' UPI Framework?
The conversation revolves around a Merchant Discount Rate (MDR), a fee that merchants pay for payment processing. Effective October 15, 2026, the National Payments Corporation of India (NPCI) has introduced a 0.4% MDR on certain person-to-merchant (P2M)
UPI transactions. This is not a tax collected by the government, but a fee distributed among the banks and payment providers that maintain the UPI infrastructure. The move is aimed at ensuring the long-term sustainability of the UPI ecosystem, which has operated on a largely zero-fee model for over six years, by funding investments in technology and security. The framework was enabled by a recent amendment to the Payment and Settlement Systems Act.
Your Everyday Payments Are Unaffected
For the average user, nothing changes. The government and NPCI have been emphatic on this point: all person-to-person (P2P) UPI transactions, like sending money to friends or family, remain completely free, regardless of the amount. Furthermore, UPI app providers are prohibited from adding any platform fees or hidden charges for consumers. The core promise of UPI as a free, convenient tool for individual users is fully intact. Banks have also been instructed to ensure merchants do not pass on the new MDR charges to customers; you should only ever pay the listed price for goods and services.
Which Transactions Attract a Fee?
The new MDR only applies to merchant transactions above ₹2,000. According to government data, payments of ₹2,000 or less make up about 96% of all merchant UPI transactions, which means the vast majority will continue to be free of any charge. For the small fraction of higher-value transactions, a 0.4% fee will be paid by the merchant. For example, on a payment of ₹3,000, the merchant would incur a fee of ₹12. For very large transactions of ₹75,000 and above, this fee is capped at a maximum of ₹300.
Exemptions for Small and Specific Merchants
The framework includes crucial protections for small businesses. Merchants who receive up to ₹1 lakh per month through UPI QR codes are completely exempt from MDR on all their transactions, even those above the ₹2,000 threshold. This ensures that street vendors, neighbourhood kirana stores, and other small-scale entrepreneurs who have embraced digital payments are not burdened. Additionally, certain strategic sectors have different rules. Payments for railways, fuel, insurance, and telecommunications will incur a flat fee of ₹5 for transactions over ₹2,000, while payments for investments like mutual funds have a lower MDR of 0.02% to encourage participation in financial markets.
Why the Government Clarification Was Needed
After operating for years as a completely free service for merchants, the introduction of any fee was bound to create confusion. Initial reports led many consumers and merchants to worry that all UPI payments would soon be charged. The government and NPCI issued swift clarifications to counter misinformation and reassure the public. Their statements have stressed that UPI remains a 'digital public good' and that the new, targeted MDR structure affects only a small slice of high-value commercial transactions, securing the system's future without impacting ordinary citizens or small businesses.
