First, What Is This MDR?
MDR stands for Merchant Discount Rate. It's not a tax or a fee paid by the customer. Instead, it is a charge that merchants pay to payment service providers (like banks and payment apps) for processing digital transactions. Think of it as a small service fee for providing
the convenience and security of instant digital payments. This fee helps maintain the vast technological infrastructure that keeps the UPI system running smoothly, securely, and efficiently. Until now, UPI transactions have largely been free of MDR due to a government mandate, but that is set to change for specific transactions.
The New Framework Explained
Starting October 15, 2026, the National Payments Corporation of India (NPCI) will introduce a nominal MDR on some UPI payments. The standard rate will be 0.4% on Person-to-Merchant (P2M) transactions that are over ₹2,000. However, the government and NPCI have been very clear: this charge is to be borne by the merchant, not the customer. For very large transactions of ₹75,000 and above, the MDR is capped at a maximum of ₹300. The key takeaway for consumers is that you should not see any new charge added to your bill when you scan a QR code to pay.
Exemption 1: All Person-to-Person (P2P) Payments
The most important exemption is that all Person-to-Person (P2P) transactions remain completely free. This means sending money to your friends, family, or domestic help will not attract any charges, no matter the amount. If you are transferring ₹500 or ₹50,000 from your bank account to another individual's bank account using UPI, it continues to be free for both the sender and the receiver. This category, which forms the bulk of UPI's value, is entirely unaffected by the new framework.
Exemption 2: Merchant Payments Up to ₹2,000
Your daily, small-value purchases are also protected. Any payment you make to a merchant (like a shopkeeper, restaurant, or online store) that is ₹2,000 or less will not attract any MDR. This ensures that everyday transactions, whether it's for your morning coffee, groceries, or a quick lunch, remain free. A transaction of exactly ₹2,000 is also exempt. According to NPCI, these smaller payments make up more than 95% of all UPI merchant transactions, meaning the vast majority of your daily payments will feel no impact whatsoever.
Exemption 3: Payments to Small Merchants
To protect small businesses and vendors, the framework includes specific exemptions for them. Merchants who are classified under the Person-to-Person-Merchant (P2PM) category will continue to receive UPI payments without any MDR. This generally covers small vendors and neighbourhood shops that receive up to ₹1 lakh per month through UPI QR codes into their personal bank accounts. For these small businesses, even if they receive a single payment over ₹2,000, no MDR will be charged as long as they fall within this category.
Exemption 4: Special Rates for Essential Services
The framework also recognises that a standard MDR isn't suitable for all sectors. For certain essential services, a much lower, flat fee of ₹5 will apply to merchant transactions above ₹2,000, instead of the 0.4% rate. These categories include railways, telecommunications, insurance payments, fuel, and utility bills like water and electricity. Furthermore, payments related to education, mutual funds, and securities will have their own special, lower MDR rates, ensuring these critical transactions remain highly affordable.
Exemption 5: Automated UPI Payments
If you use UPI AutoPay for your recurring payments, there's good news. These automated transactions are also exempt from the new MDR structure. This means your monthly subscriptions for OTT platforms, mobile bills, insurance premiums, or systematic investment plans (SIPs) that are paid via a UPI mandate will continue without any new processing charges being applied under this framework.
