The Short Answer: No Extra Cost for Most Users
Let's get straight to the point: for the vast majority of shoppers, nothing changes. If you use UPI to pay a friend or family member (a person-to-person, or P2P, transaction), it remains completely free, regardless of the amount. Likewise, if you scan
a QR code at a shop and pay directly from your linked bank account, you will not be charged any extra fee. The government and the National Payments Corporation of India (NPCI) have been clear that customers will not be directly charged for making UPI payments under the new framework. So, you can continue using UPI for your daily needs without worrying about surprise fees on your end.
So What Is This New Fee?
The new charge is called a Merchant Discount Rate (MDR). This is not a fee for the customer, but a fee paid by certain merchants for the service of processing a digital payment. Effective from October 15, 2026, an MDR of 0.4% will apply to specific merchant transactions over ₹2,000. For instance, on a purchase of ₹3,000, the merchant would incur a ₹12 fee. This fee is capped at ₹300 for very large transactions of ₹75,000 or more, ensuring costs don't spiral for high-value sales. The key thing for shoppers to understand is that this is a cost for the business, not for you.
Which Transactions Are We Talking About?
The new MDR only applies to a specific type of transaction: person-to-merchant (P2M) payments over ₹2,000 made via a Prepaid Payment Instrument (PPI). A PPI is essentially a digital wallet where you load money in advance, like a Paytm or PhonePe wallet balance. If you pay a merchant over ₹2,000 using the balance stored in your digital wallet, the merchant will be subject to the MDR. However, if you use the same UPI app but choose to pay directly from your linked bank account, the transaction remains free of this charge for both you and the merchant. This distinction between paying from a wallet balance versus a bank account is crucial.
Why Was This Change Made?
The introduction of MDR is aimed at ensuring the long-term health and sustainability of the UPI ecosystem. Running a massive digital payment network that processes billions of transactions requires significant investment in infrastructure, server capacity, cybersecurity, and innovation. The MDR provides a revenue stream for the payment service providers—like banks and wallet companies—who bear these operational costs. By ensuring these companies can cover their expenses, the system can remain robust, secure, and continue to grow. Without it, there is less incentive for them to invest in the network's upkeep and expansion.
How It Affects Merchants
While customers are shielded from the charge, merchants are the ones who will see an impact. However, the framework includes important exemptions. Small merchants, such as those receiving up to ₹1 lakh per month via UPI, will remain exempt from MDR. This ensures that small businesses are not burdened by the new costs. For larger businesses, the 0.4% MDR is still significantly lower than the fees associated with credit card payments, which can range from 1.5% to 2.5%. Furthermore, certain essential sectors like fuel, railways, telecom, and insurance will have a concessional flat MDR of just ₹5 for transactions above ₹2,000. This tiered approach aims to balance the sustainability of the system with the financial realities of different businesses.
