The Core Change: A Merchant Fee
The biggest change is the introduction of a Merchant Discount Rate (MDR) for certain transactions. An MDR is a fee that merchants pay to their bank or payment service provider for processing a digital payment. From October 15, 2026, a standard MDR of 0.4%
will apply to Person-to-Merchant (P2M) UPI payments above ₹2,000. This isn't a new tax from the government; it's a charge within the payment ecosystem designed to help cover the costs of running the vast UPI network. The fee is shared between the banks and payment apps that make the transaction possible.
Will You Be Charged for Using UPI?
The short and reassuring answer is no. The new MDR is explicitly a charge for merchants, not customers. Government sources and the National Payments Corporation of India (NPCI) have been clear: customers will not pay any extra fee when making a UPI payment, regardless of the amount. Sending money to friends or family (Person-to-Person or P2P) remains completely free. Furthermore, all merchant payments up to ₹2,000 are also exempt from this new fee, which covers the vast majority—around 96%—of all UPI merchant transactions.
How This Affects Merchants
For merchants, the impact depends on their size and transaction values. Many small businesses are protected. For instance, small 'P2PM' merchants who receive up to ₹1 lakh per month via UPI QR codes will continue to have zero MDR. This ensures that your neighbourhood kirana store or street vendor likely won't be affected. The rules target larger businesses that process higher-value transactions. For a payment of ₹3,000, a merchant would pay an MDR of ₹12. To prevent excessive charges on very large payments, the fee is capped at ₹300 for any transaction of ₹75,000 or more.
Why Are These Rules Changing?
Since UPI charges were scrapped in 2020, the platform has seen explosive growth, but the companies running the infrastructure have been operating without a clear revenue model. This new MDR framework is intended to make the UPI ecosystem financially self-sustainable. The revenue will help fund ongoing investment in the system's security, technology, fraud prevention, and customer support. It is also aimed at encouraging the expansion of UPI services into more rural and semi-urban areas.
Concessions and Special Rates
The rules also include special, lower rates for certain essential sectors. For payments above ₹2,000 towards railways, telecom, insurance, and fuel, a lower flat fee of ₹5 will apply instead of the 0.4% rate. Financial services like mutual funds and stockbroking will have an even lower MDR of 0.02%, also capped at ₹300. These distinctions are made to balance the need for sustainability with the economic realities of different sectors.
Could Shops Ask You to Pay More?
This is a key concern. While merchants are officially barred from passing the MDR cost directly to consumers, some fear it could happen indirectly. A recent survey indicated that 76% of users might switch to cash or cards if merchants tried to add a surcharge for UPI payments above ₹2,000. The government and banks have stated they will work to ensure merchants do not pass this charge on to customers, but the real-world outcome will become clearer after the rules take effect.
