The End of the Zero-Fee Era?
Since 2016, the Unified Payments Interface (UPI) has revolutionised commerce in India, largely because it was free for both customers and merchants. However, that is changing. Starting October 15, 2026, a Merchant Discount Rate (MDR) will apply to certain
UPI transactions. This move, announced by the National Payments Corporation of India (NPCI), is intended to create a sustainable revenue model to support the system's massive growth, covering costs for infrastructure, cybersecurity, and innovation. For large merchants, understanding the nuances of this new framework is critical, as it directly impacts the cost of accepting digital payments.
What Are the New Charges?
The new fee is a 0.4% MDR on person-to-merchant (P2M) UPI transactions valued above ₹2,000. This means that for a payment of ₹10,000 received via UPI, the merchant will incur a fee of ₹40. To prevent excessive costs on high-value sales, the MDR is capped at ₹300 for any transaction of ₹75,000 or more. Importantly, this charge is levied on the merchant and is not supposed to be passed on directly to the customer. The government has explicitly prohibited merchants from adding the fee to a customer's bill.
Which Transactions Are Actually Affected?
This is the most crucial detail for businesses. The 0.4% MDR does not apply to all UPI payments. Person-to-person (P2P) transfers, such as sending money to friends or family, remain completely free. All merchant transactions up to ₹2,000 are also exempt from any charges. This preserves the zero-cost model for the vast majority of daily, low-value payments. The new fee specifically targets higher-value merchant payments. Initially, there was confusion around charges for payments made via Prepaid Payment Instruments (PPIs) or wallets, but the new rule from October 2026 applies a standard 0.4% MDR on most UPI merchant payments above the threshold.
Exemptions for Small and Specific Merchants
The NPCI has carved out important exemptions. Small merchants under the P2PM framework—defined as those receiving up to ₹1 lakh per month via UPI—will continue to pay zero MDR on all transactions, regardless of the amount. This is designed to protect small businesses and kirana stores that were crucial to UPI's mass adoption. Furthermore, certain strategic sectors have special, lower rates. For transactions over ₹2,000, categories like railways, telecom services, insurance, and fuel will attract a flat fee of ₹5 instead of the 0.4% rate.
Impact on Large Merchant Operations
For large merchants with high transaction volumes, the cumulative impact of a 0.4% MDR can be significant, even with the ₹300 cap. Businesses operating on thin margins will need to factor this new cost into their financial planning. While merchants are barred from directly charging customers, some business associations fear it could indirectly lead to price adjustments over time. The primary action for large businesses is to engage with their payment service providers to understand precisely how these fees will be implemented and reflected in their settlement reports. This new cost of acceptance, while still lower than typical credit card MDRs, marks a fundamental shift in the economics of India's leading digital payment system.
