The Big Question: Do You Pay More?
For the average user, nothing changes. The government and the National Payments Corporation of India (NPCI) have clarified that person-to-person (P2P) UPI transactions remain completely free, regardless of the amount. This means sending money to friends,
family, or your local shopkeeper from your bank account via UPI still costs nothing. Customers will not be charged for making UPI payments, and the government has advised that merchants should not pass any new costs on to consumers.
Introducing the Merchant Discount Rate (MDR)
The major change is the introduction of a Merchant Discount Rate (MDR) on certain business transactions. Effective October 15, 2026, a fee of 0.4% will be applied to specific person-to-merchant (P2M) UPI payments over ₹2,000. For very large transactions of ₹75,000 or more, this fee is capped at a maximum of ₹300. It's important to understand that MDR is not a new tax collected by the government. Instead, it is a fee that is distributed among the players in the payment ecosystem, such as banks and payment app providers, to cover the costs of transactions.
Who Actually Pays This Fee?
The MDR is a charge that merchants must pay, not customers. However, not all merchants are affected. The new fee specifically targets certain merchant transactions above the ₹2,000 threshold. Crucially, small merchants are protected. Those receiving up to ₹1 lakh per month through UPI QR codes are exempt from this MDR. The government estimates that over 95% of all merchant transactions, which are typically low-value, will remain unaffected by this change, continuing to have zero MDR.
Why Was This Change Necessary?
For years, the UPI system operated on a zero-fee model for merchants, a policy that was crucial for its widespread adoption. While this drove massive growth, processing billions of transactions monthly has significant operational costs, including server maintenance, fraud prevention, and cybersecurity. The zero-MDR model was sustained by government subsidies, but these did not cover the full cost of running the network. Introducing a nominal MDR on higher-value transactions is intended to make the UPI ecosystem financially self-sustainable, ensuring it can continue to scale, innovate, and remain secure for the long term.
Impact on Small and Medium Businesses
For the vast majority of small businesses like local kirana stores, tea stalls, and vendors whose individual transactions are typically below ₹2,000, there will be no immediate impact. However, for businesses that regularly process higher-value transactions—like electronics stores, travel agencies, or B2B suppliers—the 0.4% fee will become a new operating cost. For example, a ₹10,000 payment would incur a ₹40 fee. While this may seem small, the cumulative cost can add up for businesses operating on thin margins, and some trade bodies have raised concerns about this added financial burden.
The PPI Connection
The discussion around UPI fees often involves Prepaid Payment Instruments (PPIs), which include digital wallets like Paytm Wallet or PhonePe Wallet. The interchange fees are primarily targeted at merchant transactions made via these PPIs for amounts over ₹2,000. A direct bank-to-bank UPI transfer remains the most common and fee-free way to transact for both individuals and many merchants. The new structure creates a clearer revenue path for wallet providers who are part of the UPI ecosystem.
