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India’s ubiquitous UPI payment system is set for a significant change from October 15, with the introduction of a merchant discount rate (MDR) on select transactions. Under the new framework, merchants will be charged an MDR of 0.4% on person to merchant (P2M) UPI transactions above ₹2,000. The charge will be capped at ₹300 for transactions worth ₹75,000 or more. The October 15 change does not necessarily make UPI a paid service for consumers. Instead, it introduces a commercial layer on the merchant side. With a 0.4% MDR for regular P2M transactions above ₹2,000 and a ₹300 cap for transactions of ₹75,000 and above. The framework keeps P2P payments free, protects P2PM merchants from MDR and provides lower flat rates for sectors such as fuel, insurance and utilities. The broader shift is from an entirely zero-MDR merchant model towards a threshold-based system intended to create a more sustainable financial model for India's UPI infrastructure. Payments Council of India's chairman and AvenuesAI CEO Vishwas Patel believes that the introduction of the charges is a key step to build a viable economic model while keeping UPI free for consumers. "At the same time, sustainability must not come at the cost of financial inclusion. The continued zero-MDR protection for eligible small and micro merchants, along with support for expanding digital acceptance in Tier III, IV centres, will help preserve UPI’s accessibility," Patel said. So, what exactly changes next month and who will actually have to pay? UPI MDR: What Is Changing From October 15? The new MDR framework will come into effect on October 15, 2026. For regular P2M transactions above ₹2,000, merchants will pay 0.4% of the transaction value as MDR. Transactions of ₹2,000 or below will continue to attract zero MDR. For high-value payments, the MDR will be capped at ₹300. This cap applies to transactions of ₹75,000 and above. In practical terms, the structure will look like this: Transaction value ₹2,000 - ₹0 MDR Transaction value ₹3,000 - ₹12 MDR Transaction value ₹50,000 - ₹200 MDR Transaction value ₹75,000 - ₹300 MDR Transaction value ₹1 Lakh - ₹300 MDR The MDR is a charge on the merchant side. Consumers will continue to pay the listed price of the product or service. P2P transactions, including transfers to friends, family or between a user's own bank accounts, will continue to remain free. UPI apps won’t be allowed to charge a platform fee or any other fee for payments made through UPI. There are also no monthly quotas under the framework that would result in consumers being charged after a certain number of UPI transactions. The new MDR is a merchant-side charge and not a consumer-facing UPI fee. Merchants onboarded under the framework cannot pass the MDR on to customers while accepting UPI payments, the NPCI said. What About Small Merchants? Not every merchant will be subject to the 0.4% MDR. Small merchants operating under the Person-to-Person-Merchant (P2PM) framework will continue to enjoy zero MDR. The framework defines these as small vendors receiving up to ₹1 Lakh per month through UPI QR codes directly into their accounts. This means a small vendor does not automatically become liable for MDR simply because a customer makes a payment exceeding ₹2,000. Acquiring banks and payment service providers will monitor the monthly inward transaction threshold. Merchants receiving more than ₹1 Lakh through UPI for three consecutive months will be transitioned to the P2M category, effectively making the Existing QR codes will continue to work and small merchants will not have to replace their QR stands or soundboxes because of the MDR changes. How Are MDR Charges Bifurcated Among Sectors? Several sectors will not be charged the standard 0.4% MDR. Instead, they will have a flat MDR of ₹5 for transactions above ₹2,000. These include categories such as railways, telecom, insurance and fuel. For example, an insurance premium or fuel payment of ₹10,000 would attract a ₹5 MDR rather than the ₹40 charge that would apply under the standard 0.4% rate. Utility payments, including electricity, water and piped natural gas, will also fall under the designated industry programme category, with a ₹5 MDR for transactions above ₹2,000. Payments below ₹2,000 in these categories will continue to remain free of MDR. What About Mutual Funds And Stock Market Payments? Capital market transactions will have a separate MDR structure. Payments involving mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02%, with a maximum cap of ₹300. The category covers regulated capital-market entities, including asset management companies, SEBI-registered stockbrokers, securities dealers and investment platforms. The lower rate is intended to distinguish investment-related payments from routine retail and commercial transactions. Will Credit Card Payments On UPI Be Affected? The new MDR framework applies specifically to direct account-to-merchant UPI payments. Credit-linked UPI transactions, such as payments made using RuPay credit cards linked to UPI or pre-sanctioned bank credit lines, operate under separate credit product rules. As a result, the MDR won't apply to these transactions in the same manner as direct bank-account-to-merchant UPI payments. How Will The MDR Revenue Be Divided? The 0.4% MDR paid by the merchant will flow through different parts of the UPI ecosystem. In effect, the ₹0.40 MDR is split as 0.28% for the issuer bank, 0.08% for the TPAP and 0.04% for the acquiring bank. For every ₹100 eligible UPI transaction, the merchant will pay ₹0.40 as MDR to the acquiring bank, which is the bank handling the merchant’s UPI account. Of this ₹0.40, ₹0.28 (0.28%) will be paid by the acquiring bank to the customer’s issuing bank as interchange. A further ₹0.08 (0.08%) will go to the UPI app provider, paid by the payer-side payment service provider (PSP). This leaves ₹0.04 (0.04%) with the acquiring bank. Why Is UPI Introducing MDR Now? The move comes as UPI has scaled to become one of India's primary digital payment systems. UPI processed 24.51 Bn transactions worth ₹29.82 Lakh Cr in August 2026 alone. The policy framework argues that operating a payment system at this scale requires significant spending on server infrastructure, bandwidth, fraud prevention, cybersecurity and banking technology. Industry estimates cited in the framework put the annual cost of maintaining UPI operations at around ₹20,000 Cr. Until now, government incentives and subsidies have helped support the ecosystem. The new framework argues that these were intended as short-term support rather than a permanent mechanism for covering payment infrastructure costs. The MDR revenue will be retained within the UPI ecosystem and is intended to support infrastructure resilience, innovation, cybersecurity and customer service. It will also What Happens To The MDR Money? A dedicated fund for small merchants is also proposed under the framework. The fund will be used to support digital payment infrastructure in Tier III to Tier IV centres, including the northeastern states, Jammu & Kashmir and Ladakh. It will also cover notified government schemes in Tier I and Tier II centres. The fund is expected to provide financial assistance to acquiring banks and payment aggregators for merchant onboarding and incentivise UPI transactions among small merchants. The detailed framework for the fund is expected to be finalised in consultation with the Reserve Bank of India within three months. Edited by Vinaykumar Rai
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