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After months of anticipation, UPI operator National Payments Corporation of India (NPCI) has introduced the merchant discount rate (MDR) fees framework for select high-value UPI transactions. MDR on UPI will take effect precisely one month from today, that is, October 15. Under the framework, standard person to merchant (P2M) transactions above ₹2,000 will attract an MDR of 0.4%, capped at ₹300 for high-value payments of ₹75,000 and above. However, peer-to-peer (P2P) transactions will continue to be free. “MDR is a charge within the merchant payment ecosystem. It is not a charge on customers making UPI payments. Banks have been advised to ensure that merchants do not pass MDR charges on to customers. UPI application providers are expressly prohibited from imposing platform fees or hidden charges,” the Ministry of Finance said in a statement. Further, small merchants, including street vendors, receiving up to ₹1 Lakh per month through UPI QR codes under the person to person merchant (P2PM) category will continue to enjoy zero MDR on all transactions. The revenue generated from the MDR will be split between ecosystem partners as follows, 0.28% as interchange fee to the issuer bank, 0.12% to the payment service provider (PSP) of the payer, and 0.08% to app providers. The Ministry noted that the framework protects individuals, micro-enterprises and small businesses while introducing a limited charge on larger merchant transactions. “Data analysis indicates that MDR will apply to only about 4% of merchant transactions. This means that approximately 96% of merchant transactions will remain unaffected, as they are either below the ₹2,000 threshold or covered by the zero-MDR framework for small merchants,” the statement read. Specific merchant categories — railways, telecom, insurance and fuel — will operate on a flat fee of ₹5 for payments exceeding ₹2,000, in order to maintain low costs for critical public services, utility bill collection, thin-margin sectors like fuel retail, and other essential consumer services Additionally, capital market transactions will incur a lower rate of 0.02%, capped at ₹300, to encourage participation in the markets ecosystem. This applies to payments towards mutual funds, stockbrokers, securities dealers, and investment platforms. The framework’s aim is to support UPI’s long-term sustainability while keeping transactions free for consumers and small merchants, the Centre reiterated. Under the plan, 5% of total MDR collections will be allocated to a dedicated fund to promote UPI adoption and usage among small merchants. Revenue from larger merchant transactions will help banks, payment service providers and UPI apps invest in payment infrastructure, particularly across rural and semi-urban areas. Introduced under the recently amended Payment and Settlement Systems Act, 2007, the framework follows deliberations by the UPI Steering Committee on rates, operations and consumer safeguards. It also aligns with the Standing Committee on Finance’s call for a viable revenue model for UPI. The Rationale Behind The Implementation Of MDR The new frameworks come at a time when the adoption and utilisation of UPI in the Indian digital transaction ecosystem is breaking records almost every month. For instance, monthly UPI transactions touched an all-time high in August, with transaction volume rising nearly 4% MoM to 24.51 Bn from 23.66 Bn in July. However, annual infrastructure, cybersecurity, and operational upkeep costs for the UPI system is increasing parallely, costing around ₹20,000 Cr per year. On the other hand, the Centre’s allocations for digital payments incentives had amounted to just a fraction of this amount. As a result, industry leaders have been advocating for the re-introduction of MDR so that banks, aggregators, and other financial institutions could monetise UPI transactions and cover their costs. “Most global payment systems (including Digital Public Infrastructures) have economic models that support infrastructure and innovation. India's approach continues to prioritise accessibility, scale and inclusion,” the NPCI said. Avoiding sole reliance on government subsidies provides revenue predictability for acquiring banks, payment service providers, and fintech apps and enables them to make long-term investments in upgrading technology, it added. NPCI believes MDR revenue can help fund investments in cybersecurity, AI-led fraud detection and encryption upgrades, while also creating a more viable business model for payment players. "The introduction of MDR on UPI would materially change the narrative around fintechs. The sector has long been viewed as one where scale has been built without a clear path to monetisation. A sustainable revenue model for UPI would alter that perception, improve investor sentiment and give the fintech ecosystem a significant boost," Pine Labs CEO Amrish Rau said. Commercialisation could also open up the UPI market to smaller and newer players that may struggle to compete with larger companies that can absorb sustained losses. The ecosystem is currently dominated by PhonePe, Google Pay and Paytm, with the top two accounting for around 78% of UPI transactions. A portion of the MDR revenue will also be used to create a dedicated fund for merchant onboarding and digital payment infrastructure in Tier III and IV regions, including the northeastern states, Jammu & Kashmir and Ladakh. The fund is aimed at improving UPI adoption among small businesses and supporting wider financial inclusion. NPCI is expected to notify the fund framework in consultation with the Reserve Bank of India (RBI) within the next three months.
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