What is Actually Changing?
Starting October 15, 2026, the National Payments Corporation of India (NPCI) will introduce a Merchant Discount Rate (MDR) of 0.4% on certain Unified Payments Interface (UPI) transactions. This fee specifically targets person-to-merchant (P2M) payments
that are over ₹2,000. It is important to note that this is not a blanket charge on all UPI use. For very large transactions of ₹75,000 or more, this fee is capped at a maximum of ₹300. The government and NPCI have been clear: customers will not be directly charged this fee. It is a cost that must be borne by the merchant's bank or payment provider. This move signals the end of the zero-MDR regime that was put in place in 2020 to boost digital payment adoption.
Your Everyday UPI Stays Free
The most important takeaway for the average user is that the vast majority of UPI transactions remain completely free. All person-to-person (P2P) payments—like sending money to friends or family—are exempt from any fees, regardless of the amount. Furthermore, any payment you make to a merchant that is ₹2,000 or less will also have no fee attached. According to government estimates, this exemption for smaller transactions covers more than 95% of all merchant payments by volume, meaning most of your daily purchases for groceries, snacks, and other small items are unaffected. Additionally, payments to qualifying small merchants who receive up to ₹1 lakh per month via UPI QR codes will also continue to be free.
Who Pays and Who Benefits?
The 0.4% MDR is a fee paid within the payment ecosystem, not by the consumer. The charge is paid by the merchant's bank to the payment service provider. While regulations prohibit merchants from passing this cost directly on to customers, there is concern that some businesses may try to factor it into their prices over time. The introduction of this fee is designed to create a sustainable revenue model for the banks, fintech companies, and payment processors that maintain the UPI infrastructure. For years, these companies have processed transactions at a loss, supported by government subsidies. The new MDR framework aims to provide them with a revenue stream to cover operational costs for security, technology, and innovation, ensuring the long-term health of the digital payments ecosystem.
Are There Any Other Special Rates?
Yes, the new framework includes special, lower rates for several essential service categories to lessen the burden. For payments above ₹2,000 towards fuel, insurance premiums, railway tickets, and utility bills, a flat fee of ₹5 will be applied instead of the 0.4% rate. This ensures that costs for these critical transactions remain predictable and low for merchants. Similarly, payments related to capital markets, such as for mutual funds or stockbroking, will attract a much lower MDR of just 0.02%, which is also capped at ₹300. Recurring payments set up through UPI AutoPay for subscriptions or bills are also exempt from these new MDR charges.
