First, What Is This 'MDR'?
MDR stands for Merchant Discount Rate. Think of it as a small processing fee that businesses (merchants) pay to banks and payment companies for the service of accepting digital payments. It’s not a tax collected by the government. Instead, this fee helps
cover the costs of running the vast, secure digital payments network that includes banks, payment gateways, and UPI apps like Google Pay or PhonePe. Before this, most UPI transactions were free for merchants, largely supported by government incentives. The new MDR aims to create a more financially sustainable system for the long run.
So, What Are the New Rules?
Effective October 15, 2026, a standard MDR of 0.4% will apply to certain person-to-merchant (P2M) UPI payments above ₹2,000. For very large transactions of ₹75,000 or more, this fee is capped at a maximum of ₹300. For example, on a ₹3,000 purchase, the merchant would pay an MDR of ₹12. On a ₹1,00,000 purchase, the fee would be capped at ₹300, not the full 0.4% which would be ₹400. This rule is primarily for payments made from a bank account directly to a merchant's UPI QR code. It's different from the pre-existing interchange fees that apply to wallet-based UPI payments.
Will I Be Charged Extra at the Shop?
No, you should not be charged extra. The new rules are clear that customers will not pay any fee for making UPI payments. The MDR is a cost for the merchant, not the consumer. The government has advised banks to ensure that merchants do not pass this cost on to customers by adding a surcharge. UPI app providers are also prohibited from charging you a separate 'platform fee' for making payments. If you send money to a friend or family member (a P2P transaction), it remains completely free, regardless of the amount.
Do All Merchants Pay This Fee?
No, not all merchants are affected. The new rules are designed to protect smaller businesses. Small merchants who receive up to ₹1 lakh per month via UPI QR code payments are exempt from this MDR. Furthermore, all merchant transactions up to ₹2,000 are also free from this charge. This means the vast majority of your daily kirana store trips, vegetable purchases, and other small retail payments will not involve any MDR. Estimates suggest that around 96% of all merchant transactions will remain unaffected by this new framework.
Are There Any Other Exceptions?
Yes, there are special, lower rates for certain essential and low-margin sectors. For payments over ₹2,000, categories like railways, telecom services, insurance, and fuel will attract a flat fee of just ₹5 per transaction, instead of the 0.4% rate. Capital market transactions, such as for mutual funds or securities, will have a much lower MDR of 0.02%, also capped at ₹300. Additionally, automated payments set up via UPI AutoPay for subscriptions or bills are also exempt from these MDR charges.
