The Most Important Point: You Don't Pay
Let’s get the biggest question out of the way first: customers do not have to pay this fee. All person-to-person (P2P) UPI payments—like sending money to a friend or family member—remain completely free, regardless of the amount. Furthermore, the government
and the National Payments Corporation of India (NPCI) have been very clear that merchants are not allowed to pass this cost on to you by adding a surcharge. If you are paying for goods or services, you only have to pay the listed price. This new charge, known as a Merchant Discount Rate (MDR), happens behind the scenes and does not come out of your pocket.
So, What Is This 0.4% Fee?
This fee is a Merchant Discount Rate (MDR) that applies only to certain types of transactions. Specifically, it is for person-to-merchant (P2M) payments over ₹2,000. This MDR of 0.4% is borne by the merchant who receives the payment. So, if you buy an item for ₹5,000, the merchant would receive slightly less after the fee is deducted by their bank. The fee is capped at ₹300 for very large transactions of ₹75,000 or more. It's crucial to understand that this fee framework does not apply to all merchant transactions. It specifically targets payments made using certain methods, which we'll explore next.
The Key Difference: Bank vs. PPI Transactions
The fee structure primarily affects transactions made via Prepaid Payment Instruments (PPIs). A PPI is essentially a digital wallet where you store money, like a Paytm Wallet or Amazon Pay balance. When you use the balance in your wallet to pay a merchant via UPI for an amount over ₹2,000, that is when this interchange system kicks in. In contrast, a standard UPI transaction—where the money is debited directly from your linked bank account—does not attract this fee for the merchant. Since most people use UPI by linking their bank accounts directly, their transactions remain entirely outside of this new MDR framework.
Why Was This Fee Introduced?
For years, UPI operated on a zero-MDR model to encourage widespread adoption, and it worked spectacularly. However, running a massive, secure payment network costs money. Payment companies, wallet providers, and banks incur costs for every transaction they process. The introduction of this MDR is designed to create a sustainable revenue stream for these ecosystem players, particularly the PPI issuers (wallet companies). By allowing them to earn a small fee on high-value merchant transactions, it ensures they can continue to invest in the infrastructure, technology, and security that keeps the UPI system running smoothly for everyone.
Who Are The Small Merchants Exempted?
The government has taken care to protect small businesses from this charge. Small merchants, often categorized under a P2PM framework, who receive up to ₹1 lakh a month via UPI QR codes, are exempt from paying the MDR. This ensures that the neighbourhood kirana store, vegetable vendor, or chaiwala who relies on UPI for daily business is not affected. The government estimates that the overwhelming majority of UPI merchant transactions fall below the ₹2,000 threshold or are made to these exempt small merchants, meaning that around 96% of all merchant transactions remain completely free of this charge.
What About Special Categories?
While the headline rate is 0.4%, the actual MDR can vary. The NPCI has defined different rates for various merchant categories. For instance, some reports have cited interchange fees of up to 1.1% for certain categories like insurance or mutual funds. On the other hand, essential sectors like fuel, railways, telecom, utilities, and education have a much lower, flat fee of just ₹5 for transactions over ₹2,000, instead of a percentage-based charge. This tiered structure is designed to balance the sustainability of the payment system with the economic realities of different industries.
