The Bottom Line for Customers: Still Free
For the vast majority of users, the good news is that UPI remains free. The National Payments Corporation of India (NPCI) has repeatedly clarified that customers will not be charged for making UPI payments. Sending money to a friend or family member,
known as a person-to-person (P2P) transaction, is completely free, regardless of the amount. Similarly, when you scan a QR code at a shop to pay for goods or services—a person-to-merchant (P2M) transaction—no fee is supposed to be levied on you, the customer. The government and NPCI have forbidden merchants and UPI apps from passing on any processing charges to consumers.
For Merchants: The New MDR Framework
The conversation around UPI charges primarily affects businesses. From October 15, 2026, a new framework introduces a Merchant Discount Rate (MDR) on certain transactions. MDR is a fee that merchants pay to their bank and other payment service providers for processing digital payments. Under the new rules, a 0.4% MDR will apply to P2M UPI transactions above ₹2,000. For example, on a payment of ₹5,000, the merchant would incur a fee of ₹20. To protect businesses from excessive fees on large sales, this charge is capped at ₹300 for any single transaction of ₹75,000 or more. This move ends the zero-MDR regime that has been in place since 2020.
Exemptions for Small Businesses and Essential Services
The new MDR doesn't apply to everyone. A crucial exemption protects small vendors. Merchants who receive up to ₹1 lakh per month through UPI QR codes will not have to pay any MDR. The government states this carve-out shields about 96% of all merchant transactions from the new charge. Furthermore, several essential service categories have special, lower rates. Instead of the 0.4% fee, payments above ₹2,000 for railways, fuel, telecom, and insurance will attract a flat MDR of ₹5 per transaction, paid by the merchant. Capital market investments like mutual funds have an even lower rate of 0.02%.
Why Introduce Charges Now?
The introduction of an MDR aims to create a sustainable financial model for the UPI ecosystem. Running the massive infrastructure behind UPI—which processed over 24 billion transactions in August 2026 alone—involves significant costs for banks and payment companies related to servers, cybersecurity, and support. For years, these players have absorbed the costs, with some government subsidies helping to bridge the gap. The industry has long argued that a zero-fee environment was not sustainable in the long run. The new, tiered MDR structure is designed to have larger commercial enterprises contribute to the system's upkeep while keeping everyday payments free for consumers and affordable for most merchants.
What About PPI and Other Rules?
There is another type of charge in the ecosystem related to Prepaid Payment Instruments (PPIs), such as digital wallets. An interchange fee of up to 1.1% applies to UPI payments over ₹2,000 made from a wallet, which is also a cost borne by the merchant's side of the system, not the customer. It is important to note that the new 0.4% MDR applies to standard UPI transactions linked directly to a bank account. As merchants adjust to the new MDR, some speculate they might ask customers to split large payments into smaller amounts below the ₹2,000 threshold to avoid the fee, though NPCI has not announced rules to prevent this.
