The Core Change: Introducing MDR
The biggest shift from October 15, 2026, is the introduction of a Merchant Discount Rate (MDR) on certain UPI transactions. This is not a fee for customers. MDR is a processing fee that merchants pay for accepting digital payments. The new rule applies
a 0.4% MDR on person-to-merchant (P2M) UPI payments above ₹2,000. This move is designed to create a sustainable revenue model for the banks and payment companies that run the UPI network, covering costs for infrastructure, cybersecurity, and innovation. Person-to-person (P2P) transfers, like sending money to family, remain completely free.
Which Merchants Are Affected?
This change does not affect all merchants equally. The most important exemptions are designed to protect small businesses. Merchants receiving up to ₹1 lakh per month via UPI QR codes are exempt from this MDR. According to NPCI's Chief Executive, approximately 75% of India's 60 million digital merchants have never even recorded a single transaction above the ₹2,000 threshold and will be completely unaffected. The burden of the new MDR will primarily fall on larger, organised businesses that process high-value transactions—most of whom already pay similar fees for credit card payments. Industry estimates suggest that only about 4% of total P2M transactions will attract the new charge.
Breaking Down the Numbers
For merchants who will be impacted, understanding the cost is crucial. For an eligible transaction of ₹3,000, the 0.4% MDR amounts to ₹12. For a payment of ₹50,000, the fee would be ₹200. To prevent excessive charges on very large transactions, the MDR is capped at ₹300 for any payment of ₹75,000 or more. For example, a transaction of ₹1 lakh will attract a flat ₹300 fee, not ₹400. This tiered structure ensures that the fee remains proportional and manageable for businesses processing significant sums.
Special Rates for Key Sectors
The new framework also includes special, lower MDRs for certain critical sectors to encourage digital payments without imposing a heavy burden. For UPI transactions above ₹2,000 in sectors like railways, telecom, insurance, fuel, and utilities, a concessional flat fee of just ₹5 will apply. Furthermore, the capital markets, including mutual funds and securities purchases, will have a distinct MDR of 0.02%, which is also capped at ₹300. These specific rates acknowledge the unique, often low-margin, nature of these essential services.
What This Means for Your Customers
One of the biggest concerns for any merchant is the customer experience. The new rules are clear: merchants are not supposed to pass this MDR cost on to customers. Consumers will not be charged for making UPI payments, and payment apps are barred from adding any platform fees for these transactions. The price a customer sees should be the price they pay, whether they use cash or UPI. If a merchant asks a customer to pay an extra amount for using UPI, the customer can report the issue to their bank or payment provider. The goal is to keep the front-end experience seamless and free for the user, preserving the trust and convenience that made UPI popular.
