Person-to-Person (P2P): The Basics
A Person-to-Person (P2P) transaction is the simplest form of UPI payment. This is when one individual sends money to another individual. Think of it as the digital equivalent of handing cash to a friend. Common examples include splitting a dinner bill,
sending money to family, or paying your rent to a landlord's personal account. These transactions are universally free for the user, a core principle that helped drive UPI's massive adoption. They are identified by the payment system as transfers between two personal bank accounts. The key here is the personal, non-commercial nature of the payment.
Person-to-Merchant (P2M): The Business Side
A Person-to-Merchant (P2M) transaction occurs when an individual pays a business for goods or services. This happens when you scan a QR code at a local kirana store, pay a bill on an e-commerce website, or pay for a service from a registered business. Unlike P2P, P2M transactions are designed for commercial use. They are routed to a merchant's current account and come with business-friendly features like higher transaction limits, API integration for websites, and cleaner accounting. This distinction is crucial because it is the foundation of the UPI fee framework.
The Merchant Discount Rate (MDR) Explained
The conversation around UPI fees almost always revolves around the Merchant Discount Rate (MDR). This is a fee that businesses (merchants) pay to their payment service provider for processing digital payments. For years, UPI transactions had a zero-MDR policy, which was subsidized by the government to encourage digital payments. However, to ensure the long-term sustainability of the UPI infrastructure, the National Payments Corporation of India (NPCI) has introduced a fee structure. It is not a charge on the customer. If you pay a merchant, the MDR is borne by the business receiving the money.
So, Will Your Daily Payments Cost More?
For the average user, the answer is no. Person-to-Person (P2P) transfers of any amount remain completely free. Furthermore, according to the framework effective October 15, 2026, P2M transactions up to ₹2,000 are also exempt from any MDR, meaning the vast majority of daily retail transactions are unaffected. Recent regulations state that only specified P2M transactions above ₹2,000 will attract a 0.4% MDR, which is paid by the merchant. For a ₹3,000 purchase, this would be a ₹12 fee for the merchant. For very large transactions of ₹75,000 or more, the fee is capped at ₹300.
The Exception: Wallet (PPI) Transactions
A key point of confusion has been the charges related to Prepaid Payment Instruments (PPIs), which include digital wallets. An interchange fee of up to 1.1% was introduced on transactions over ₹2,000 made from a wallet to a merchant via UPI. This fee is part of the settlement process between the wallet provider and the merchant's bank. It does not apply to standard bank-to-bank UPI transfers, which constitute the majority of transactions. Even in this case, the charge is officially borne by the merchant, not the customer making the payment.
Protecting Small Businesses
The new framework includes specific protections for small businesses. Small merchants who receive up to ₹1 lakh per month via UPI are exempt from MDR, ensuring that street vendors and neighborhood shops are not burdened. This means the zero-MDR policy that helped millions of small businesses adopt digital payments remains in place for them. The government estimates that this, combined with the ₹2,000 transaction threshold, means approximately 96% of all merchant transactions will remain free of any charges.
