What Is the New Fee?
The National Payments Corporation of India (NPCI) is introducing a Merchant Discount Rate (MDR) of 0.4% on certain UPI transactions. This MDR applies specifically to person-to-merchant (P2M) payments that are over the value of ₹2,000. This fee is not
a tax, but a processing charge that merchants will pay to their bank or payment processor. The fee is also capped; for any transaction of ₹75,000 or more, the maximum MDR will be ₹300. So, a ₹5,000 payment to an eligible merchant will incur a ₹20 fee, while a ₹1,00,000 payment will incur the maximum ₹300 fee.
Which Businesses Will Pay?
The new MDR is targeted at medium and large merchants. The framework includes significant exemptions to protect small businesses. Micro-merchants and small vendors who receive up to ₹1,00,000 per month via UPI QR codes are completely exempt from this new fee. Person-to-person (P2P) transfers, like sending money to a friend, remain entirely free for everyone, regardless of the amount. Critically, all merchant transactions up to ₹2,000 are also exempt. According to NPCI and government estimates, these exemptions mean that over 95% of all P2M transactions will remain free of any charges.
Does This Affect Customers?
No, customers will not directly pay any fee for using UPI. The NPCI and the Finance Ministry have been explicit that UPI remains free for consumers. Merchants are prohibited from passing the MDR cost directly on to customers by, for example, charging ₹2,012 for a ₹2,000 item paid via UPI. Payment apps like Google Pay and PhonePe are also barred from adding platform fees for UPI payments. However, some experts raise concerns that businesses might eventually absorb these costs into their overall pricing strategies, which could indirectly affect consumers over time.
Are There Special Rates for Certain Industries?
Yes, the framework includes concessional rates for specific high-volume sectors to ease the burden. Instead of the 0.4% variable rate, a flat fee of ₹5 will apply to transactions over ₹2,000 for industries like railways, telecom, utilities, insurance, and fuel payments. This is designed to keep costs predictable for essential services. Additionally, payments made towards investments like mutual funds or to stockbrokers will attract a much lower MDR of 0.02%, capped at ₹300. Recurring auto-debit mandates for bills and subscriptions are also exempt.
Why Is This Happening Now?
After nearly six years of a zero-MDR policy that fueled explosive growth, the new fee structure is aimed at ensuring the long-term financial sustainability of the UPI ecosystem. Running the massive infrastructure behind UPI—including servers, cybersecurity, and inter-bank settlements—incurs significant operational costs for banks and payment service providers. While the government has provided some subsidies, a 22-member panel including banks and payment industry bodies decided that a structured MDR was necessary to create a sustainable revenue model that encourages further investment, innovation, and expansion of the network.
