First, What Is a Merchant Discount Rate (MDR)?
Before diving into the changes, it's important to understand the Merchant Discount Rate, or MDR. This isn't a tax or a fee paid by consumers. Instead, MDR is a processing fee that businesses pay to accept digital payments. It's common for credit and debit
card transactions and is designed to cover the costs incurred by banks, payment service providers, and network operators for ensuring the payment infrastructure is secure and reliable. This fee is typically a percentage of the transaction amount and is shared among the different players in the payment ecosystem.
The 0.4% Rate: Not for Every UPI Transaction
The good news for consumers is that UPI is not suddenly becoming a paid service for everyone. The new framework, effective from October 15, 2026, introduces a 0.4% MDR specifically for certain person-to-merchant (P2M) payments. Any transaction you make to another individual (person-to-person, or P2P) remains completely free, regardless of the amount. Furthermore, all merchant payments up to ₹2,000 are also exempt from this MDR, which covers the vast majority of everyday transactions for most users. Government data suggests that around 96% of all merchant transactions will remain unaffected by this new charge.
Identifying the 'Eligible' Transactions
So, which transactions are eligible for the 0.4% MDR? The charge applies to person-to-merchant (P2M) UPI payments with a value greater than ₹2,000. For example, if you buy an item worth ₹3,000 from a shop and pay via UPI, the merchant would incur an MDR of ₹12 (0.4% of ₹3,000). To prevent excessive charges on high-value purchases, the MDR is capped at a maximum of ₹300 per transaction. This cap is reached at a transaction value of ₹75,000; any payment above that amount will still only incur a flat ₹300 fee. Small merchants who receive up to ₹1 lakh per month via UPI QR codes will also continue to enjoy zero MDR benefits.
Special Rates for Key Sectors
Not all industries will be subject to the standard 0.4% rate. Recognizing that some sectors operate on thin margins or provide essential services, the framework specifies lower, concessional rates. For transactions above ₹2,000, payments for railways, telecom services, fuel, and insurance will attract a flat MDR of ₹5 per transaction. Meanwhile, payments related to the capital markets, such as for mutual funds or to stockbrokers, will have a much lower MDR of 0.02%, also capped at ₹300.
Who Actually Pays This Fee?
Finance Minister Nirmala Sitharaman has clarified that the MDR is to be borne by the merchant, not the customer. The charge is not supposed to be passed on to the consumer at the point of sale. The introduction of this fee aims to create a sustainable revenue model to support the UPI ecosystem's maintenance, security, and innovation. While merchants will see a small portion of their revenue from eligible transactions go towards this fee, it remains significantly lower than the typical MDR for credit cards, which can range from 1.5% to 2.5%.
What This Means for Shoppers and Businesses
For the average customer, nothing changes. Your UPI payments to friends and family are still free, as are your smaller daily purchases at shops. You should not be asked to pay an extra fee for using UPI on larger transactions. For merchants, this marks a shift from the zero-MDR regime that has been in place for UPI since 2020. While it introduces a new operational cost, the structure is designed to be less burdensome than card payments. However, some merchant groups, like the All India Mobile Retailers Association, have protested the move, arguing it will impact the profitability of small businesses operating on low margins.
