What Exactly is This New Charge?
The new charge is called a Merchant Discount Rate, or MDR. It's a fee that merchants pay to payment processors for the service of accepting digital payments. From October 15, 2026, a 0.4% MDR will apply to person-to-merchant (P2M) UPI payments that are
over ₹2,000. It's crucial to understand that this is not a fee levied on customers. The National Payments Corporation of India (NPCI), which runs UPI, has been very clear: consumers will not pay this charge. The fee is part of the payment processing ecosystem and is meant to be absorbed by the merchant receiving the payment. Banks have been explicitly instructed to ensure this cost is not passed on to the person making the payment.
So, My UPI Payments Remain Free?
Yes, for the overwhelming majority of use cases, UPI remains completely free for you, the user. All person-to-person (P2P) transactions—like sending money to family or friends—are still free, regardless of the amount. Furthermore, all merchant payments up to ₹2,000 are also exempt from this new MDR. Given that most daily UPI transactions for essentials fall well below this threshold, your regular payment habits will not be affected. The government estimates that around 96% of all merchant transactions will remain unaffected by this new charge, as they are below the ₹2,000 limit.
Which Merchants Are Affected?
The 0.4% MDR applies specifically to Person-to-Merchant (P2M) transactions above ₹2,000. However, there are significant exemptions. Small merchants enrolled under the Person-to-Person Merchant (P2PM) scheme who receive up to ₹1 lakh a month through UPI are completely exempt from this MDR. This is designed to protect small vendors and neighbourhood stores. For larger, established businesses, this fee will apply. For very large transactions of ₹75,000 or more, the MDR is capped at a maximum of ₹300. This structured approach ensures that while the ecosystem gets revenue, the burden on most businesses remains minimal.
Are There Any Special Cases?
Yes, the NPCI has defined different rates for certain essential sectors to keep costs low. For transactions above ₹2,000, categories like railways, fuel, telecom, and insurance will attract a lower, flat MDR of ₹5 per transaction instead of the 0.4% rate. Utility bill payments also fall under this concessional structure. Furthermore, payments related to mutual funds and securities will have an even lower MDR of 0.02%. It's also important to note that UPI AutoPay mandates for things like subscriptions or SIPs are entirely excluded from this new MDR framework, meaning they remain free regardless of the amount.
Why Is This Change Being Made Now?
For years, the government has promoted UPI with a zero-MDR policy to drive adoption. While incredibly successful, this model put financial strain on the banks and payment service providers who bear the cost of running the infrastructure. This new, targeted MDR is being introduced to create a sustainable revenue model for the ecosystem. By applying a small fee only to high-value commercial transactions, the goal is to ensure that payment providers can continue to invest in the security, reliability, and innovation of the UPI platform without affecting its widespread use among the general public and small businesses.
