What Exactly Is the New Charge?
Starting October 15, a Merchant Discount Rate (MDR) will apply to some UPI payments. This is a fee that merchants pay for processing digital transactions. Specifically, a 0.4% MDR will be levied on person-to-merchant (P2M) transactions over ₹2,000. For
very large transactions of ₹75,000 or more, this fee is capped at a maximum of ₹300. It's crucial to understand this is not a new tax from the government. Instead, it's a processing fee that helps sustain the payment system. The National Payments Corporation of India (NPCI) has clarified that this framework is designed to help banks and payment service providers cover the costs of maintaining and upgrading the vast UPI infrastructure.
So, Who Pays the Fee?
The fee is paid by the merchant receiving the payment, not the customer making it. If you buy a television for ₹50,000 and pay via UPI, the merchant pays the MDR on that transaction; you do not pay anything extra. The money collected from MDR is distributed among the various players that make a UPI transaction possible: the merchant's bank, the customer's bank, the payment app (like Google Pay or PhonePe), and the app's sponsor bank. This revenue helps them fund system security, innovation, and expansion. The government and NPCI have been firm that merchants are not supposed to pass this cost on to consumers by adding a surcharge at checkout.
Will My Payments Now Cost More?
No, your payments will not cost you more. All person-to-person (P2P) UPI transactions—like sending money to a friend or family member—remain completely free, regardless of the amount. Furthermore, all merchant payments you make up to ₹2,000 are also exempt from this MDR. Since official estimates suggest that over 95% of all merchant UPI transactions are below this ₹2,000 threshold, the vast majority of your daily payments for groceries, food, and other small purchases will be unaffected. The change is targeted only at higher-value merchant transactions, which make up a small fraction of total volume but a large share of the total value.
Why Is This Happening Now?
For years, UPI's growth was fuelled by a zero-MDR policy, which encouraged widespread adoption among both consumers and merchants. While this strategy was incredibly successful, it made the system financially unsustainable without continuous government subsidies. The sheer volume of transactions—billions each month—requires massive investment in technology, cybersecurity, and fraud prevention. Introducing a nominal MDR on larger merchant transactions is a strategic move to create a self-reliant revenue model for the UPI ecosystem. This ensures that payment processors have the funds and the incentive to keep the system running smoothly, securely, and ready for future growth.
How Will This Affect Small Businesses?
The new framework includes specific protections for small businesses. Small merchants, defined as those receiving up to ₹1 lakh per month via UPI QR codes, are completely exempt from the new MDR. This ensures that small kirana stores, street vendors, and other local businesses that have become pillars of the digital payments revolution are not burdened. The fee primarily impacts larger, more established businesses, which are better positioned to absorb the cost as a standard operational expense, much like they already do for credit and debit card transactions. In fact, the 0.4% UPI MDR is significantly lower than the typical 1.5% to 2.5% fee for credit card payments.
