What Exactly Is the New Charge?
The National Payments Corporation of India (NPCI) has introduced a Merchant Discount Rate (MDR) for certain UPI transactions. Effective October 15, 2026, a charge of 0.4% will be levied on person-to-merchant (P2M) payments that are over ₹2,000. This isn't
a fee for all UPI use; it specifically targets larger transactions made to businesses. To protect enterprises from excessive fees on very high-value payments, the charge is capped at a maximum of ₹300 per transaction for any payment of ₹75,000 or more. For instance, a payment of ₹1,00,000 will incur a flat ₹300 fee, not ₹400. This move marks the first time a merchant charge has been applied to bank account-based UPI payments since the government mandated a zero-MDR policy in 2020.
Will You Pay More for Your Purchases?
The short answer is no. This new MDR is a charge levied on the merchant, not the consumer. The NPCI and the government have been clear that customers will continue to use UPI for free, and merchants are barred from passing the cost on directly. All person-to-person (P2P) transfers, like sending money to friends or family, remain completely free, regardless of the amount. Similarly, any merchant payment up to ₹2,000 is also exempt from this charge. This means the vast majority of daily UPI transactions, which NPCI estimates to be over 95% of the total volume, will not be affected. However, while direct charges are forbidden, some experts and retailer associations worry that businesses might eventually adjust their prices to absorb this new operational cost, especially in competitive markets.
Which Transactions and Merchants Are Affected?
The 0.4% MDR applies to person-to-merchant (P2M) transactions over ₹2,000. However, there are significant exemptions. Small merchants, defined as those receiving up to ₹1 lakh per month via UPI QR codes, will continue with zero MDR. This is designed to protect small vendors and businesses in the unorganised retail sector from the new charge. Furthermore, certain essential service categories have a different, lower fee structure. For sectors like railways, fuel, telecom, and insurance, a flat fee of just ₹5 will apply for transactions over ₹2,000 instead of the 0.4% rate. Payments for capital market activities will attract a much lower 0.02% fee, also capped at ₹300. Automated payments like subscriptions and utility bills set up via UPI AutoPay are also exempt from these MDR charges.
Why Is This Change Happening Now?
The introduction of an MDR aims to create a self-sustaining financial model for the UPI ecosystem. Since 2020, UPI has operated on a zero-MDR model, which has been supported by government incentives. While this fueled incredible adoption, processing billions of transactions monthly requires massive investment in infrastructure, cybersecurity, and innovation. Banks and payment companies have been bearing these operational costs. The government and NPCI state that this nominal charge on larger commercial transactions will provide a revenue stream to be shared among the ecosystem players — the banks and payment service providers — that maintain and expand the network. The revenue is intended to support the system's resilience and fund further expansion of digital payments into rural and semi-urban areas. It is not a tax and no part of the fee goes to the government.
What Does This Mean for Businesses?
For large merchants and online businesses, this introduces a new cost of accepting digital payments. While UPI remains significantly cheaper than traditional payment methods like credit cards (which have MDRs from 1.5% to 2.5%), it is no longer entirely free for high-value transactions. Some large retailers may absorb the cost to stay competitive, but it could impact their profit margins. For small merchants, the situation is more complex. While those with monthly UPI receipts under ₹1 lakh are exempt, there is concern about the compliance burden of tracking this threshold. The Retailers Association of India has warned that this could make some small businesses hesitant to accept UPI for larger amounts. To address this, a portion of the MDR collected will be used to establish a dedicated fund to subsidise and accelerate digital payment infrastructure for small merchants, particularly in tier 3-6 cities.
