India is changing the way larger merchant payments on UPI are priced. From October 15, 2026, specified person-to-merchant transactions above ₹2,000 will attract a Merchant Discount Rate (MDR) of 0.4%.
The charge will be borne within the merchant payment ecosystem and not by customers making UPI payments. Banks have also been advised to ensure that merchants do not pass the MDR on to customers. Person-to-person transfers will continue to remain free regardless of the amount transferred.
The change does not mean that every UPI purchase will become chargeable. According to the Ministry of Finance, around 96% of person-to-merchant transactions are expected to remain outside the new MDR framework.
How the 0.4% MDR Will Work
For regular person-to-merchant transactions above ₹2,000, the merchant will bear an MDR of 0.4%. The charge is capped at ₹300 for transactions of ₹75,000 and above.
A ₹3,000 purchase, for instance, would result in an MDR of ₹12. At ₹10,000, the charge would be ₹40. A transaction of ₹75,000 would reach the ₹300 ceiling, and the MDR would not increase beyond that cap for a higher-value payment.
The money collected through MDR is not a tax and will not be collected by the government or NPCI. It will be distributed among participants in the payments ecosystem, including banks, payment service providers and UPI application providers. The government said the framework is intended to support payment infrastructure, cybersecurity, innovation and customer service.
Small Merchants and Everyday Payments Stay Outside the Charge
The framework has been designed to keep smaller UPI transactions free. Merchant payments of up to ₹2,000 will continue to carry zero MDR.
There is a separate exemption for small businesses. Street vendors, neighbourhood shops and other small merchants receiving up to ₹1 lakh per month through UPI QR codes under the Person-to-Person-Merchant category will continue to pay zero MDR on their transactions.
The government estimates that MDR will apply to only about 4% of merchant transactions. The remaining 96% will either fall below the ₹2,000 threshold or qualify for the small-merchant exemption.
P2P transfers are completely outside the MDR framework. Sending ₹5,000 to a friend or family member, for example, will not attract the charge simply because the amount exceeds ₹2,000. The new rate applies to specified merchant payments, not transfers between individuals.
Lower Charges for Fuel, Insurance and Other Essential Payments
Not every merchant category above ₹2,000 will face the standard 0.4% rate.
Payments above ₹2,000 for railways, telecommunications, insurance, fuel and agricultural inputs will carry a flat MDR of ₹5 per transaction. The concessional treatment also covers specified public utility payments.
Capital-market transactions have a separate structure. UPI payments relating to mutual funds, securities, stockbrokers and dealers will attract MDR of 0.02%, subject to a maximum of ₹300 per transaction.
Customers Will Continue to Use UPI Without a Fee
For consumers, the central point is straightforward. The new framework does not introduce a charge for making UPI payments. UPI application providers are prohibited from levying platform fees or hidden charges under the framework, while banks have been advised to prevent merchants from passing MDR costs directly to customers. Individuals will also continue to have free P2P usage without monthly quotas or tiered charging limits.
The government has also provided for a dedicated fund to encourage UPI adoption among smaller businesses. An amount equivalent to 5% of total MDR collections will be contributed to the fund, which is intended to support wider UPI acceptance and participation by small merchants.
The October 15 change therefore marks a shift in the economics of UPI, while free UPI usage for consumers remains unchanged. The cost is being introduced selectively on larger merchant payments, while everyday purchases, individual transfers and eligible small merchants remain outside the MDR framework.
