The Centre has changed the legal framework for charges applicable to digital payments, paving the way for a new Merchant Discount Rate (MDR) structure
for select UPI transactions from October 15. Under the revised framework, UPI payments up to Rs 2,000 will continue to attract zero MDR, while charges will apply to certain higher-value merchant payments. The Government of India amended the Payment and Settlement Systems (PSS) Act, 2007, allowing it to specify electronic payment modes and transaction categories where charges cannot be imposed. The move is aimed at providing greater clarity and transparency around digital payment costs. On September 14, 2026, the government notified that Unified Payments Interface (UPI) transactions up to Rs 2,000 would remain free of MDR. NPCI subsequently issued a detailed circular on September 15 following deliberations by the UPI steering committee. The framework lays down operational rules, fee-sharing arrangements and transaction-category limits. UPI Payments: What Will Remain Free? Person-to-person (P2P) UPI transactions will remain completely free, regardless of the amount transferred. P2P payments account for around 37 per cent of UPI transactions by volume and nearly 70 per cent by value. The new MDR structure will therefore primarily affect person-to-merchant (P2M) transactions above Rs 2,000. This means consumers will continue to be able to make UPI payments without a direct transaction charge, while certain merchants and participants in the payment ecosystem will bear the applicable MDR. 0.4% MDR On Merchant Payments Above Rs 2,000 Under the new framework, a 0.4 per cent MDR will apply to eligible P2M transactions exceeding Rs 2,000. The amount collected will be distributed among participants in the UPI ecosystem, including banks and payment application providers. There is also a ceiling for larger payments. For transactions of Rs 75,000 and above, the MDR will be capped at Rs 300 per transaction. The structure is intended to create a revenue stream for the payment ecosystem while keeping charges limited for consumers and smaller transactions. Railways, Fuel And Telecom Get Flat Rs 5 MDR Certain essential and high-volume sectors will not follow the standard 0.4 per cent MDR structure. Railways, telecom, insurance, fuel and agriculture-input transactions, among other specified categories, will attract a flat MDR of Rs 5 for transactions above Rs 2,000. These categories represent around 17% of UPI P2M transaction volumes and approximately 46% of merchant-payment value. The flat-fee model is aimed at providing greater predictability to sectors where margins can be relatively thin or where digital payments play an important role in everyday services. Capital Market Payments To Attract Lower MDR A separate, significantly lower rate has been prescribed for capital market-related transactions. Payments involving mutual funds, securities, stock brokers and dealers will attract an MDR of 0.02 per cent, subject to a maximum charge of Rs 300. The lower rate is designed to keep digital payment costs relatively low for transactions linked to formal financial market participation. Small Vendors To Continue With Zero MDR Small merchants have been given a separate protection under the Person-to-Person-Merchant (P2PM) framework. Merchants receiving up to Rs 1 lakh per month through UPI QR codes under the P2PM classification will continue to benefit from mandatory zero MDR on all transactions. The provision is particularly relevant for small and informal businesses, including street vendors and micro merchants, as it allows them to continue accepting digital payments without an MDR burden. No Platform Fees Or Hidden Charges For Consumers The framework also includes safeguards for UPI users. UPI application providers have been prohibited from imposing platform fees or other hidden charges on transactions. Banks have also been advised to ensure that merchants do not transfer the MDR cost to customers paying through UPI. For individual users, there will be no monthly quota or transaction-volume limit determining access to free UPI payments. The transaction limits imposed by banks and NPCI, ranging from Rs 1 lakh to Rs 5 lakh depending on the transaction category, are security and risk-management measures rather than commercial fee thresholds. Only 4% Of Merchant Transactions Expected To Be Hit The new MDR regime is expected to have a relatively limited impact on the overall merchant-payment ecosystem. According to the data analysis cited in the framework, only around 4 per cent of merchant transactions will be affected by the introduction of MDR. Most transactions either fall below the Rs 2,000 threshold or qualify for zero MDR under the P2PM category. This effectively keeps micro and small businesses largely insulated from the new payment cost. 5% Of MDR Collections To Fund Small-Merchant Adoption The new framework also proposes a dedicated fund to encourage UPI adoption among small merchants. Five per cent of the total MDR collected will be contributed to this fund. The money will be used to promote UPI acceptance and support wider adoption among small businesses, particularly in rural and semi-urban markets. What The New UPI MDR Framework Means The revised framework effectively creates a differentiated pricing structure for UPI merchant payments while preserving free access for consumers and protecting smaller merchants. P2P transactions will remain free, UPI payments up to Rs 2,000 will carry zero MDR, and qualifying P2PM merchants will continue to be exempt. Higher-value P2M transactions will face the new charges, with separate provisions for essential sectors and capital market transactions. The government has said the broader objective is to create a sustainable revenue model for UPI while supporting investments in technology, security and fraud prevention. The framework is also aligned with recommendations made by the Standing Committee on Finance in its 32nd report.
