0.4% MDR kicks in from October 15 for ₹2,000-plus UPI payments

Sources stress MDR is not a tax on UPI, since the fee is distributed among participants in the payments chain rather than accruing to the government

Payments made through Unified Payments Interface (UPI) will remain free for consumers, but certain merchants will, from October 15, pay a fee on transactions above ₹2,000, marking the first charge on UPI since the government made the system free in 2020.

 

The National Payments Corporation of India (NPCI), which operates UPI, said a merchant discount rate (MDR) of 0.4 per cent would apply to person-to-merchant UPI transactions above ₹2,000. The fee will be capped at ₹300 for transactions of ₹75,000 or more.

 

Person-to-merchant (P2M) transactions up to ₹2,000 will remain free of MDR. Peer-to-peer (P2P) transactions, such as transfers between family and friends, will also remain free.

 

 

Banks, along with UPI payment apps such as PhonePe, Google Pay and Paytm, are expected to be among the biggest beneficiaries of the new MDR regime, as the fees will be distributed among participants in the payments chain. 

 

Payments to small vendors, classified as P2PM, will also remain free of any MDR. P2PM merchants are small vendors receiving up to ₹1 lakh a month through UPI, a category that particularly benefits businesses in rural and semi-urban areas.

 

An MDR is a fee paid by a merchant for accepting digital payments. Industry sources stressed that the new charge is “not a tax on UPI”, since the proceeds will be distributed among participants in the payments chain rather than going to the government.

 

The recipients include the issuing or remitter bank that holds the customer’s account, the acquiring bank that onboards the merchant, the payment service provider bank and the UPI app. Payment aggregators are paid from the acquiring side.

 

“Consumers making payments through UPI will not face any charges. Individual account holders can continue using UPI applications for all routine, daily expenses without worrying about any charges. The MDR policy ensures that UPI remains free and accessible for all citizens across India,” NPCI said.

 

UPI app providers will also be prohibited from imposing platform fees or any other charges on customers for UPI transactions, NPCI said.

 

The new framework will take effect on October 15 2026, giving acquiring banks, payment aggregators, fintech applications and corporate accounting platforms time to update their software engines and billing systems, it said.

 

Speaking with Business Standard, Vishwas Patel, chairman of the Payments Council of India, said: “The MDR is expected to further sustain the growth of UPI and not necessarily create profit pools for companies. It will further enable to invest in growing the UPI ecosystem in the country. It will also fund investments in cybersecurity and overall technology infrastructure keeping the payments system robust.”

 

Caveats on UPI MDR

 

The 0.4 per cent rate will not apply uniformly across merchant categories.

 

Recurring payments mandates on UPI, or UPI AutoPay, will not attract any prescribed MDR. This covers recurring payments such as monthly utility bills, OTT streaming subscriptions and recurring investments, NPCI said.

 

A flat fee of ₹5 will apply to certain merchant categories for transactions above ₹2,000. These include payments for railways, telecom services, insurance, fuel, electricity distribution, municipal water charges and piped natural gas, among others.

 

Capital market transactions will attract an MDR of 0.02 per cent, subject to a maximum cap of ₹300. The category covers payments for mutual funds, securities, stockbrokers and dealers, as well as equity purchases, debt-market investments, mutual fund purchases and broker wallet top-ups.

 

Educational fee collections, including school tuition, university term fees and institutional entrance examinations, fall under a designated industry programme category. Transactions above ₹2,000 will benefit from flat-fee structures or capped processing rates, limiting the impact of percentage-based charges on large fee payments, NPCI said. 

The fee map

 

P2P dominates: P2P accounts for 70% of UPI value; P2M makes up 30%

High-value P2M targeted: 67% of P2M value comes from payments above ₹2,000

Capped at ₹300: MDR on P2M payments of ₹75,000 or more

Exemptions: P2P, P2PM and UPI AutoPay remain MDR-free; apps cannot levy platform or transaction fees on customers

Special rates: Flat ₹5 for utilities, fuel, insurance & select sectors; 0.02% for capital markets; ₹700 crore annual fund for certain regions

 

Dedicated fund for special regions

 

NPCI will establish a dedicated fund for small merchants to subsidise and accelerate digital-payment infrastructure across Tier III to Tier VI regions. The initiative will cover the north-eastern states, Jammu and Kashmir and Ladakh, as well as Tier I and Tier II areas.

 

A source said the fund is expected to receive about ₹700 crore a year. Details are expected to be finalised in consultation with the Reserve Bank of India within the next three months.

 

A similar Payments Infrastructure Development Fund (PIDF) scheme culminated in December 2025.