What Exactly is Changing?
The National Payments Corporation of India (NPCI) has introduced a new fee, known as a Merchant Discount Rate (MDR), for some UPI transactions. Effective October 15, 2026, merchants will be charged a 0.4% fee on person-to-merchant (P2M) UPI payments they
receive that are over ₹2,000. This isn't a blanket fee on all transactions. It specifically targets higher-value commercial payments, ending the zero-fee policy that has been in place for years to help make the UPI network financially self-sustaining.
Do Shoppers Pay This Fee?
No, and this is the most critical point for consumers. The 0.4% MDR is a fee that is paid by the merchant receiving the money, not the customer making the payment. The government and NPCI have been very clear: UPI remains free for consumers. Banks have been advised to ensure merchants do not pass this charge on to their customers. So, when you scan a QR code to pay for an item over ₹2,000, you will not see an extra charge on your bill. Person-to-person (P2P) transfers, like sending money to friends or family, also remain completely free, regardless of the amount.
Which Transactions Are Affected?
The new fee framework is quite specific. It only applies to person-to-merchant payments of more than ₹2,000. The vast majority of daily UPI transactions, which are typically small-value purchases, will remain completely free of any charges for merchants. In fact, official estimates suggest that around 96% of all merchant transactions will be unaffected by this new rule. Furthermore, small merchants who receive up to ₹1 lakh per month through UPI QR codes are also exempt from this MDR, offering protection to small businesses and street vendors.
Understanding the Nuances
To add a layer of predictability for businesses, the 0.4% fee has a ceiling. For very large transactions of ₹75,000 or more, the MDR is capped at a maximum of ₹300. This prevents the fee from becoming excessively high on big-ticket purchases. Additionally, certain essential or low-margin sectors have been given special consideration. For example, payments above ₹2,000 for railways, fuel, insurance, and telecom services will attract a flat ₹5 fee instead of the percentage-based charge. This tiered approach aims to balance the need for revenue with the economic realities of different industries.
Why Were These Fees Introduced?
The zero-fee model helped UPI achieve massive adoption, but running such a large and complex digital infrastructure costs money. The industry has long argued that a sustainable revenue model is necessary to cover the costs of technology, cybersecurity, fraud prevention, and continued innovation. The Reserve Bank of India has backed the move, stating that it is an important step toward strengthening the long-term sustainability of India's digital payments ecosystem. The revenue generated from the MDR will be distributed among the various participants in the UPI ecosystem, such as banks and payment service providers, to support their operations and investments in the network.
