What Exactly Is the New Fee?
Starting October 15, 2026, the National Payments Corporation of India (NPCI) has introduced a Merchant Discount Rate (MDR) on certain UPI transactions. This is a fee that eligible merchants will pay when they receive a UPI payment. The standard rate is set
at 0.4% for person-to-merchant (P2M) payments that are over ₹2,000. This is not a fee charged to customers. If you are sending money to a friend or family member (a person-to-person or P2P payment), these transfers remain completely free, regardless of the amount. Similarly, any payment you make to a merchant for ₹2,000 or less also remains outside of this new standard MDR framework.
So, Who Pays This Fee?
The fee is paid by the merchant, not the customer. The government and NPCI have been clear that merchants are not allowed to pass this cost on to consumers by adding a “UPI charge” to your bill. For example, if you buy an item for ₹5,000 from an eligible merchant, the 0.4% MDR of ₹20 will be absorbed by the business; you only pay ₹5,000. The fee is capped at a maximum of ₹300 for any single transaction of ₹75,000 or more. This system is designed to create a sustainable revenue stream for the banks and payment service providers that maintain the vast UPI infrastructure, covering costs for security, technology, and operations.
Does This Affect All Merchants?
No, there are significant exemptions. The new MDR framework is primarily aimed at larger, organised businesses. Small merchants are largely protected. Any merchant who receives up to ₹1 lakh per month through UPI QR code payments is exempt from this fee. This means the vast majority of small neighbourhood shops, street vendors, and independent sellers who rely on UPI for daily collections will not be affected. According to analysts, this exemption ensures that around 96% of all UPI merchant transactions will remain free of this charge, shielding small businesses from additional costs.
What About Wallet Payments?
This is where some earlier confusion arose, so it's important to distinguish between different UPI payment types. A standard UPI payment transfers money directly from your linked bank account to the merchant's account. A different type of transaction involves using a Prepaid Payment Instrument (PPI), such as a digital wallet. There is a separate, pre-existing interchange fee that can apply to UPI payments made via wallets for amounts over ₹2,000. However, the new 0.4% MDR rule effective from October 15 specifically applies to bank account-to-merchant transactions, clarifying the cost structure for the most common type of UPI payment.
Are There Special Rates for Certain Sectors?
Yes, the NPCI has also outlined concessional rates for essential services to lessen the impact. For merchant payments above ₹2,000 in specific categories like railways, fuel, telecom, and insurance, a lower, flat MDR of ₹5 will be applied instead of the 0.4% rate. Furthermore, transactions related to the capital markets, such as payments to stockbrokers or for mutual funds, will attract an even lower MDR of just 0.02%, acknowledging the different nature of financial transactions. These tailored rates show an effort to balance the need for system sustainability with the economic realities of different industries.
