The New Rule Explained
Starting October 15, 2026, a new rule will introduce a fee on some, but not all, UPI transactions. This fee is called a Merchant Discount Rate (MDR) and is set at 0.4% for specific merchant payments exceeding ₹2,000. It is crucial to understand this is not a charge
on customers. The government and the National Payments Corporation of India (NPCI) have clarified that merchants are not allowed to pass this cost on to the person making the payment. So, if you buy something for ₹3,000, you still only pay ₹3,000. The merchant, however, will pay a ₹12 fee from that amount to the payment ecosystem participants.
Who Actually Pays? Not the Customer
The most important takeaway is that regular users will not see any new charges. Person-to-person (P2P) transfers, like sending money to friends or family, remain completely free, regardless of the amount. Similarly, payments made to any merchant for amounts up to ₹2,000 will also have no charge for either the customer or the merchant. The 0.4% MDR is only for person-to-merchant (P2M) transactions above ₹2,000. Even then, many small merchants are exempt. Those who receive up to ₹1 lakh per month via UPI QR code payments will not have to pay the MDR. This ensures that the vast majority of daily transactions and small businesses are unaffected, with estimates suggesting about 96% of all merchant transactions fall below the threshold or are otherwise exempt.
Why the Change? Sustaining the Ecosystem
For years, the UPI system has operated at little to no cost for users and merchants, a strategy that massively boosted its adoption. However, running such a vast and secure infrastructure costs money. Banks, payment gateways, and UPI apps all incur expenses for server maintenance, cybersecurity, and innovation. The government previously provided subsidies, but with transaction volumes soaring into the trillions of rupees monthly, a more sustainable commercial model was deemed necessary. The MDR is designed to provide a revenue stream for these service providers, ensuring they can continue to invest in and maintain the UPI network's reliability and security. The funds are distributed among the customer's bank, the payment gateway, the UPI app, and the app's sponsoring bank.
Impact on Merchants and Payment Choices
While customers are shielded from direct fees, the rule change could influence behaviour. Larger merchants who are subject to the MDR might subtly encourage cash for high-value purchases, though this is discouraged by regulators. The fee, while lower than typical credit card processing charges of 1.5% to 2.5%, still represents a new cost for businesses. For certain essential services like railways, telecom, fuel, and insurance, the fee is a flat ₹5 for transactions over ₹2,000, while sectors like capital markets have a lower rate of 0.02%. As a user, this change might make you more conscious of how you pay for big-ticket items, even though the final price you see at checkout should not change whether you use UPI or another method. The Supreme Court has sought responses from the RBI and NPCI regarding the new charge but has not stayed its implementation.
The Future of Your UPI Payments
The introduction of MDR is a significant milestone for UPI, moving it from a government-supported growth model to a self-sustaining one. For the average user, the experience remains unchanged for the vast majority of transactions. UPI continues to be a free, fast, and convenient way to handle P2P transfers and most daily merchant payments. The ₹2,000 threshold is not a new transaction limit but simply the point at which the internal accounting of the payment ecosystem changes for some businesses. The system's core promise of free and easy digital payments for the public remains intact, with these adjustments aimed at securing its foundation for the future.
