What Isn’t Changing for You
First, let's clear up the biggest worry: for customers, almost nothing is changing. Person-to-person (P2P) UPI payments, like sending money to friends or family, remain completely free, regardless of the amount. Similarly, making a payment to a merchant
for an amount up to ₹2,000 is also exempt from the new charges. The government and the National Payments Corporation of India (NPCI) have clarified that customers will not be required to pay any extra fees when making UPI payments. Banks have been advised to ensure merchants do not pass on any new costs to the consumer.
Understanding MDR: The Merchant Fee
The new charge is called the Merchant Discount Rate (MDR). This is not a tax or a fee on customers, but a processing fee that merchants pay to payment service providers for facilitating digital transactions. Starting October 15, 2026, an MDR of 0.4% will be applied to specified person-to-merchant (P2M) UPI transactions above ₹2,000. For example, on a payment of ₹5,000, the merchant would incur an MDR of ₹20. This fee is capped at a maximum of ₹300 per transaction, which applies to payments of ₹75,000 or more. So, even on a ₹1 lakh transaction, the MDR would be ₹300, not ₹400.
Which Specific Payments Are Affected?
The 0.4% MDR applies specifically to person-to-merchant (P2M) payments over ₹2,000. However, there are important exceptions. Small merchants who receive up to ₹1 lakh per month via UPI QR codes are exempt from this MDR. This is designed to protect neighbourhood kirana stores, street vendors, and other small businesses. Furthermore, the government estimates that these exemptions mean around 95-96% of all merchant UPI transactions will remain unaffected by the new charges. The changes are primarily aimed at larger, organised merchants who process higher-value transactions.
Special Rates for Essential Services
Not all merchants will face the standard 0.4% rate. To protect sectors with thin margins, a special, lower MDR structure has been created. For qualifying transactions above ₹2,000 in sectors like railways, telecommunications, insurance, and fuel, a flat MDR of ₹5 per transaction will apply instead of the percentage-based fee. Payments for educational fees and government utility bills like electricity and water are also covered under this flat-fee structure. Additionally, capital market transactions, such as those for mutual funds and securities, will have an even lower MDR of 0.02%, capped at ₹300.
Why Is This Change Happening Now?
For years, banks and payment service providers have argued that the zero-MDR regime for UPI, while excellent for driving adoption, was financially unsustainable. Running the massive UPI infrastructure—including servers, fraud prevention systems, and technical support—costs thousands of crores annually. The introduction of a structured MDR is intended to create a viable revenue model for the ecosystem participants like banks and payment apps. This revenue helps ensure long-term investment in the security, resilience, and innovation of the UPI network, which has become the backbone of India's digital economy.
