The government has introduced a new Merchant Discount Rate (MDR) framework for selected Unified Payments Interface (UPI) merchant transactions, bringing a 0.4% MDR on specified person-to-merchant (P2M) UPI payments above ₹2,000. The new framework is aimed at creating a more sustainable revenue model for India’s rapidly expanding digital payments ecosystem while keeping UPI transactions free for consumers and protecting small merchants.
The government has clarified that the new MDR is not a tax or a charge collected by the government or NPCI. Instead, the amount is distributed among participants in the payment ecosystem, including banks, payment service providers and UPI application providers.
The framework is scheduled to come into effect from October 15, 2026, according to the government’s announcement.
What Is MDR and Why Does It Matter?
Merchant Discount Rate, commonly known as MDR, is a fee associated with processing digital payments. It is generally paid within the merchant payment ecosystem to compensate various participants involved in processing and settling a transaction.
Under the new UPI framework, MDR will not be applied universally. Instead, it will be based on the type and value of the transaction.
For specified merchant payments above ₹2,000, the standard MDR will be 0.4%. For transactions of ₹75,000 and above, the MDR will be capped at ₹300 per transaction.
For instance, a ₹10,000 merchant transaction at a 0.4% MDR would generate an MDR of ₹40, while a ₹50,000 transaction would generate ₹200. Once the transaction reaches ₹75,000, the applicable MDR is capped at ₹300.
The framework therefore introduces a threshold-based system instead of applying a charge to every UPI payment.
UPI Payments Up to ₹2,000 Will Remain Free
One of the key features of the new framework is that merchant payments up to ₹2,000 will continue to remain free of MDR.
This means customers purchasing everyday items through UPI at participating merchants will not face a separate UPI transaction charge merely because they are using the digital payment system.
The government has also clarified that all person-to-person (P2P) UPI transactions will remain completely free, regardless of the amount transferred.
This distinction is important because UPI is widely used not only for shopping but also for sending money to family members, friends and other individuals.
Around 96% of Merchant Transactions Expected to Remain Unaffected
According to the Ministry of Finance, the new MDR framework is expected to affect only around 4% of merchant transactions.
Approximately 96% of P2M transactions will remain unaffected, either because they fall below the ₹2,000 threshold or because they are covered by the zero-MDR framework for eligible small merchants.
The government has therefore positioned the new framework as a targeted mechanism rather than a blanket charge on UPI merchant payments.
This could allow the majority of consumers and small businesses to continue using UPI in much the same way as before.
Small Merchants to Continue Receiving Zero-MDR Benefit
Small businesses have been given specific protection under the new framework.
Small merchants, including street vendors and neighbourhood businesses, receiving up to ₹1 lakh per month through UPI QR codes under the specified P2PM category will continue to receive zero-MDR treatment on their transactions.
This provision is particularly relevant because small retailers and informal businesses have become major users of QR-based digital payments.
For a small shopkeeper, street vendor or local service provider, even relatively small payment-processing costs can affect margins. Maintaining zero MDR for eligible small merchants is therefore intended to prevent the new framework from discouraging digital payment acceptance among micro-businesses.
Customers Will Not Have to Pay the 0.4% MDR
The introduction of MDR has also generated questions about whether consumers will have to pay an additional 0.4% when making large UPI payments.
The government’s clarification is that MDR is a merchant-side payment ecosystem charge and not a direct fee on consumers.
Banks have been advised to ensure that merchants do not pass the MDR cost on to customers. UPI application providers are also prohibited from imposing platform fees or hidden charges on users under the new framework.
Therefore, a customer making a qualifying ₹10,000 UPI payment should not automatically see an additional ₹40 deducted from their bank account as an MDR charge.
Higher-Value Transactions Will Have a Defined Cap
The framework also introduces a ceiling for larger merchant transactions.
For qualifying P2M transactions of ₹75,000 and above, MDR will be capped at ₹300 per transaction.
The cap is significant for merchants handling large-value digital payments because it prevents the percentage-based MDR from increasing indefinitely as the transaction value rises.
For example, at 0.4%, a ₹1 lakh transaction would ordinarily result in an MDR of ₹400. However, under the new framework, the applicable MDR would be limited to ₹300 because of the cap.
Special Rates for Essential and Thin-Margin Sectors
The government has also created a separate structure for certain essential and thin-margin sectors.
Merchant transactions above ₹2,000 in areas such as railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat MDR of ₹5 per transaction rather than the standard 0.4% rate.
This approach provides greater predictability for businesses operating in sectors where margins may be relatively narrow or where digital payments are closely connected with essential services.
The special treatment also means that merchants and consumers cannot assume that every transaction above ₹2,000 will automatically be subject to the standard 0.4% calculation.
Lower MDR for Capital Market Transactions
The framework also includes a separate rate for transactions connected with capital-market activities.
Payments relating to mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02%, with the amount capped at ₹300 per transaction.
The differentiated rate reflects the government’s decision to create separate treatment for specific categories rather than applying one uniform MDR across every type of merchant payment.
Why Is the Government Introducing MDR?
The government has linked the new framework to the long-term sustainability of UPI.
Since its launch, UPI has grown from a relatively new digital payment platform into a major part of India’s financial infrastructure. The rapid increase in transaction volumes requires continuous investment in payment infrastructure, cybersecurity, fraud prevention, technology upgrades and system resilience.
The government had previously said that an enabling amendment to the Payment and Settlement Systems Act was intended to support UPI’s long-term sustainability, technological advancement and resilience against emerging risks.
The latest framework provides a mechanism through which participants in the payment ecosystem can receive revenue from selected higher-value merchant transactions.
Revenue Will Be Shared Across the Payment Ecosystem
The 0.4% MDR is not designed as a government revenue collection mechanism.
According to the Ministry of Finance, the MDR will be distributed among participants involved in processing UPI merchant payments, including banks, payment service providers and UPI application providers.
This is significant because UPI has historically operated with very limited direct monetisation opportunities for several participants in the ecosystem.
As transaction volumes have expanded, banks and fintech companies have continued to invest in infrastructure and technology needed to process payments securely and reliably.
The new model is intended to provide an additional source of revenue from a limited segment of higher-value merchant transactions.
5% of MDR Collections to Support Small Merchants
The government has also announced a dedicated mechanism to support UPI adoption among small merchants.
Under the framework, an amount equivalent to 5% of total MDR collections will be contributed to a dedicated fund aimed at promoting UPI adoption among small merchants.
The initiative is intended to encourage wider acceptance and continued use of UPI among small businesses, particularly in areas where digital payment infrastructure is still developing.
This could be relevant for India’s rural and semi-urban markets, where QR-based payments have increasingly become an important way for small businesses to accept digital payments.
What Does the New Framework Mean for Small Businesses?
For small businesses that fall within the zero-MDR category, there should be no immediate MDR-related increase in payment-processing costs under the new framework.
However, merchants handling larger-value transactions above the threshold will need to understand how MDR applies to their category.
Businesses may also need to review their payment settlements and accounting processes to understand how the MDR is reflected in their transaction reports and settlements.
For merchants, the key issue will be distinguishing between eligible zero-MDR transactions, standard 0.4% transactions and transactions covered by special sector-specific rates.
What Does It Mean for Consumers?
For consumers, the government’s clarification is straightforward: UPI payments remain free for individuals.
Person-to-person transactions remain outside the MDR framework, while merchant payments up to ₹2,000 also remain free of MDR. Eligible small merchants will continue to receive zero-MDR treatment.
The government has also stated that individuals will not face monthly quotas, volume restrictions or tiered caps on free UPI usage because of the new MDR framework.
This means the new policy is primarily a change in how selected merchant transactions are monetised rather than a general consumer fee on UPI.
UPI’s Growing Role in India’s Digital Economy
The MDR decision comes at a time when UPI has become a central component of India’s digital payments ecosystem.
Government data shows that UPI processed 2,366 crore transactions worth ₹29.9 lakh crore in July 2026 alone, highlighting the enormous scale at which the system now operates. UPI has also expanded internationally, with the system live in multiple countries.
The scale of UPI means that even a relatively small change in the economics of merchant payments can have implications for banks, fintech companies, payment applications and merchants.
At the same time, maintaining low-cost access remains important for UPI’s continued adoption, particularly among consumers and smaller businesses.
Balancing Sustainability With Affordable Digital Payments
The new MDR structure attempts to address two competing requirements of India’s digital payment ecosystem.
On one side, payment companies, banks and infrastructure providers need sustainable revenue to maintain and expand the technology behind UPI. On the other, UPI’s widespread adoption has been supported by its low-cost and convenient nature.
By applying MDR only to selected merchant transactions above ₹2,000 while maintaining zero-MDR provisions for small merchants and lower-value payments, the framework creates a distinction between different categories of UPI usage.
The government has said that the structure is intended to protect individuals and small merchants while supporting continued investment in the UPI ecosystem.
What Merchants Should Watch Before Implementation
Merchants using UPI extensively should pay attention to their payment service provider’s communication before the new framework takes effect.
Businesses should understand how their transactions are classified, whether they qualify for the small-merchant zero-MDR framework and which MDR rate applies to their industry.
They should also review settlement statements after implementation to ensure that applicable charges are being correctly calculated.
Payment aggregators, banks and UPI applications will similarly need to make the necessary technical and operational changes before the framework becomes effective.
The Bigger Picture for India’s Fintech Sector
The introduction of MDR could also influence the economics of India’s fintech and digital-payment sector.
UPI has helped create a highly competitive environment in which consumers can choose among multiple payment applications. However, payment companies still incur costs related to technology, customer support, fraud prevention, compliance and infrastructure.
A limited MDR mechanism could provide additional revenue to ecosystem participants while retaining free access for consumers.
The longer-term impact will depend on transaction volumes, merchant behaviour, competition among payment providers and how effectively the new framework operates in practice.
Conclusion
The government’s introduction of a 0.4% MDR on specified UPI merchant payments above ₹2,000 marks an important change in the economics of India’s digital payment ecosystem.
However, the new framework does not mean that UPI has become a paid service for consumers. Person-to-person UPI transactions will remain free, merchant payments up to ₹2,000 will remain free, and eligible small merchants will continue to receive zero-MDR treatment.
The government estimates that around 96% of merchant transactions will remain unaffected, while the MDR will primarily apply to a limited share of higher-value merchant payments.
The policy is ultimately aimed at creating a more sustainable financial structure for UPI while maintaining its accessibility for consumers and small businesses. As the framework moves toward implementation, merchants, banks, fintech companies and payment applications will be watching closely to understand how the new MDR structure affects payment costs, settlements and the wider digital payments market.
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