The Core Change: A New Merchant Fee
The National Payments Corporation of India (NPCI) has announced that from October 15, 2026, a Merchant Discount Rate (MDR) of 0.4% will apply to certain person-to-merchant (P2M) UPI payments. This is not a blanket fee on all UPI use; it specifically targets
merchant transactions valued at over ₹2,000. For very large transactions, the MDR is capped at ₹300 for payments of ₹75,000 or more. It is crucial to understand that this charge is paid by the merchant, not the customer. The Ministry of Finance has emphasised that merchants are not permitted to pass this cost on to consumers.
Which Payments Are Affected?
The new MDR framework is precise about which transactions are impacted. Standard bank-to-bank UPI payments, which form the vast majority of transactions, remain completely free for both merchants and customers. Person-to-person (P2P) transfers, like sending money to friends or family, are also unaffected. The 0.4% charge applies only to P2M transactions exceeding the ₹2,000 threshold. Since payments up to ₹2,000 account for over 95% of all merchant transactions, the daily operations of most small businesses and routine consumer purchases will not change.
Exemptions for Small and Essential Businesses
The new rules include important exemptions designed to protect small businesses and essential services. Small merchants, such as street vendors, who receive up to ₹1 lakh per month via UPI QR codes will continue to pay zero MDR on all transactions. Additionally, certain essential sectors will have a different fee structure. Payments over ₹2,000 for railways, telecom, insurance, fuel, and agriculture will attract a flat MDR of just ₹5 per transaction instead of a percentage. This flat rate is designed to provide cost stability for critical public services and industries with thin margins.
Why Is This Happening Now?
The introduction of an MDR aims to ensure the long-term financial sustainability of the UPI ecosystem. With UPI processing a staggering 24.51 billion transactions in August 2026 alone, the cost of maintaining and scaling the infrastructure is immense. The revenue from MDR is not a government tax; it is distributed among the payment ecosystem participants, including banks, payment service providers, and app developers. This helps cover the costs of server capacity, cybersecurity, fraud prevention, and innovation, ensuring the system remains robust and secure for its hundreds of millions of users.
What Merchants Should Do
Merchants, particularly those with a significant volume of high-value transactions, should prepare for this change. The first step is to understand which of your incoming payments will fall under the new MDR framework. Review your transaction history to gauge the potential impact. It is also advisable to contact your payment acquirer or bank to confirm the exact charges applicable to your business category. While the standard rate is 0.4%, some sectors have concessional or flat rates. For GST-registered businesses, the GST paid on the MDR amount can be claimed as an input tax credit, which can help offset the new cost.
