The National Payments Corporation of India (NPCI) has announced a 0.4% Merchant Discount Rate (MDR) on specified Person-to-Merchant (P2M) UPI transactions above ₹2,000, effective October 15, 2026. The MDR will be capped at ₹300 per transaction for payments of ₹75,000 and above.
However, consumers will not be charged for making UPI payments: all Person-to-Person (P2P) transactions will remain free, while merchant payments up to ₹2,000 will also remain outside the MDR framework. The Finance Ministry said around 96% of P2M transactions will remain unaffected, with small merchants covered under the zero-MDR framework also protected.
The decision follows Parliament’s amendment of Section 10A of the Payment and Settlement Systems Act, 2007, which created an enabling framework for charges on specified digital payments.
Finance Minister Nirmala Sitharaman had earlier assured Parliament that consumers, street vendors and small merchants would not bear UPI charges. The government says the new framework is aimed at supporting the long-term sustainability, security and expansion of India’s rapidly growing digital payments ecosystem.
What The New MDR Means
From October 15, merchants receiving specified UPI payments above ₹2,000 will face a 0.4% MDR, subject to a maximum charge of ₹300 for transactions of ₹75,000 and above. This means a ₹3,000 payment would attract an MDR of ₹12, while a ₹50,000 payment would attract ₹200.
Once the transaction reaches ₹75,000, the MDR is capped at ₹300 rather than increasing further. The charge applies to the merchant-side payment ecosystem and is not a tax collected by the government or NPCI.
The Finance Ministry has clarified that MDR is distributed among participants such as banks and payment application providers to support the operation and expansion of the UPI network. Importantly, P2P transactions remain free regardless of the amount, meaning a person transferring ₹5,000 or ₹50,000 to another individual will not pay an MDR.
The framework also provides protection for small merchants. Payments to merchants of up to ₹2,000 will remain free, while eligible small merchants under the zero-MDR framework will continue to be exempt. The Finance Ministry estimates that approximately 96% of P2M transactions will remain unaffected.
The distinction is significant because UPI has become deeply embedded in India’s everyday economy, particularly among small shops, roadside vendors and service providers. The government has also said banks must ensure that the merchant-side MDR is not passed on to consumers, while UPI applications cannot impose additional platform or hidden charges under the framework.
Why UPI Is Introducing MDR
The decision comes after years of explosive growth in India’s digital payments ecosystem. UPI processed 2,451 crore transactions worth around ₹29.9 lakh crore in August 2026, according to recent data, highlighting the enormous scale of the network. Reuters reported that the new MDR is intended to help support spending on payment infrastructure, cybersecurity and innovation as UPI continues to expand.
The move follows Parliament’s passage of the Taxation and Other Laws (Amendment) Bill, 2026, which amended Section 10A of the Payment and Settlement Systems Act. The amendment itself did not impose a UPI charge; instead, it created an enabling legal framework for specified electronic payment transactions.
When Parliament debated the legislation in August, Sitharaman said the provision did not impose a tax or transaction charge on consumers. She also said that any future MDR would be limited to a prescribed category of merchant transactions and that small merchants would not be targeted.
The final framework follows that assurance by keeping P2P payments free and exempting low-value merchant transactions. A 22-member UPI & Services Steering Committee, comprising representatives from banks, payment service providers and industry associations, was involved in deliberations over the merchant pricing structure. The government says the objective is to balance affordability and widespread adoption with the long-term sustainability of the payment ecosystem.
The Logical Indian’s Perspective
UPI has transformed how Indians pay for everything from a cup of tea to household purchases, and its biggest strength has been its simplicity: scan, pay and move on. The introduction of MDR therefore makes it important to maintain a clear distinction between merchant-side payment costs and consumer charges.
The latest framework keeps everyday users and most small-value transactions outside the new charge regime, while creating a revenue mechanism for a system that now handles billions of transactions every month. At the same time, transparency will matter: merchants should clearly understand what they are being charged, and consumers should not be made to believe that UPI itself has suddenly become a paid service. A
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