What Exactly is Changing?
The National Payments Corporation of India (NPCI) has introduced a Merchant Discount Rate (MDR) for certain UPI transactions. Effective October 15, 2026, merchants will be charged a 0.4% fee on person-to-merchant (P2M) payments they receive that are valued
above ₹2,000. For very large transactions of ₹75,000 or more, this fee is capped at a maximum of ₹300. It is crucial to note that this charge applies only to the merchant; customers will not pay any fee for making UPI payments, and person-to-person (P2P) transfers remain entirely free, regardless of the amount.
Are There Any Exemptions?
Yes, the new rules have been designed with several important exemptions to protect small businesses and everyday transactions. The MDR does not apply to any transaction of ₹2,000 or less. Furthermore, small merchants, including street vendors, who receive up to ₹1 lakh per month via UPI QR codes are completely exempt from this charge. Official data analysis suggests this means approximately 96% of all merchant transactions will remain unaffected by the new fee structure. This targeted approach ensures that the vast majority of small-scale commerce that has come to rely on free UPI payments will not see an increase in costs.
A Different Rule for Specific Sectors
The government has also outlined special, lower rates for certain essential and high-volume sectors to ensure cost stability. Instead of the 0.4% fee, a flat MDR of just ₹5 will apply to transactions over ₹2,000 for railways, telecom services, fuel, and insurance payments. Additionally, the financial sector, including payments for mutual funds, securities, and stock brokers, will attract a much lower MDR of 0.02%, with the ₹300 cap still applying. This tiered system is designed to balance the sustainability of the UPI system with the thin margins and public service nature of these industries.
The 'Why' Behind the New Fee
For years, the costs of operating the massive UPI infrastructure have been absorbed by banks and payment companies, supported by government incentives. This new MDR framework aims to make the UPI ecosystem financially self-sustainable. The Reserve Bank of India has backed the move, stating that it will encourage continued investment in technology, cybersecurity, and payment network expansion. The revenue generated will be distributed among the payment partners—including banks and app providers—who keep the system running, ensuring UPI can continue to innovate and serve hundreds of millions of Indians securely.
Impact on Businesses and Customers
For customers, the experience remains unchanged: UPI payments continue to be free. The government has also explicitly barred merchants from passing the MDR cost on to consumers. However, some business groups have expressed concern that the new fee, while small, will increase operating costs. For businesses that handle frequent high-value transactions, such as electronics retailers, jewellers, or travel agents, this new cost will need to be factored into their financial planning. It marks a significant evolution from the zero-MDR regime that helped UPI achieve its massive scale. The change signals a maturing of the payments ecosystem, where the convenience of UPI for large transactions now comes with a nominal cost to ensure its long-term health.
