UPI’s Six-Year Free Era Set to Change: NPCI Introduces 0.4% MDR on Large Merchant Payments From October 15
India’s Unified Payments Interface (UPI) is entering a new phase of its evolution, with the National Payments Corporation of India (NPCI) announcing a Merchant Discount Rate (MDR) of 0.4% on specified person-to-merchant (P2M) transactions above ₹2,000. The new framework will take effect from October 15, 2026, marking the first broad-based merchant charge on larger UPI payments after years of a zero-MDR model.
The change does not mean that consumers will start paying a UPI transaction fee. The MDR is a merchant-side charge, and the government has said banks must ensure that merchants do not pass the cost on to customers. UPI applications are also prohibited from imposing platform fees or hidden charges on these transactions.
Under the standard structure, a merchant receiving ₹3,000 through UPI would incur an MDR of ₹12, while a ₹50,000 transaction would attract ₹200. For transactions of ₹75,000 or more, the MDR is capped at ₹300, meaning a ₹1 lakh payment would not generate a ₹400 MDR but would remain subject to the ₹300 ceiling.
The framework nevertheless preserves the free nature of most everyday UPI payments. Person-to-person transfers will remain completely free regardless of transaction value, while standard merchant payments up to ₹2,000 will not attract MDR. The government estimates that around 96% of merchant transactions will remain unaffected by the new framework.
Small merchants have also been specifically protected. Merchants receiving up to ₹1 lakh per month through UPI QR codes under the P2PM category will continue to receive payments without MDR. The exemption is designed to cover small vendors, neighbourhood businesses and street-level merchants that depend heavily on low-cost digital payments.
Certain sectors will have a separate flat-rate structure rather than the 0.4% percentage charge. Payments above ₹2,000 involving specified essential and thin-margin categories such as railways, telecommunications, insurance, fuel and agricultural inputs will attract an MDR of ₹5 per transaction.
Capital-market transactions will also have a distinct rate. UPI payments involving mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02%, subject to a maximum of ₹300. The lower rate is intended to avoid creating a significant additional cost for retail participation in financial markets.
The government says the change is aimed at creating a more sustainable financial model for the rapidly expanding UPI infrastructure. UPI processed about 2,451 crore transactions worth ₹29.9 lakh crore in August 2026, according to government information cited in the new framework. The authorities have pointed to continuing expenses associated with technology infrastructure, fraud prevention, cybersecurity, bandwidth and banking-system support.
The MDR collected will not become a government tax. According to the government, it will be distributed among participants in the payment ecosystem, including banks, payment service providers and UPI application providers. The stated objective is to support infrastructure resilience, innovation, cybersecurity, fraud prevention and customer service as transaction volumes continue to rise.
A portion of the MDR revenue will also be directed towards expanding UPI acceptance among smaller merchants. NPCI has proposed a dedicated fund receiving 5% of MDR collections, with the fund intended to support wider digital-payment adoption among small merchants, particularly in underserved areas.
The announcement follows the government’s August 2026 amendment to the Payment and Settlement Systems Act, which created the legal enabling framework for introducing charges on specified UPI transactions. At that time, the government had stressed that consumers would not face UPI transaction charges and that any future MDR would be limited to selected merchant transactions.
The significance of the decision lies less in the size of the 0.4% charge than in the change to UPI’s underlying economic model. Since its rapid expansion, UPI’s zero-cost merchant acceptance has been a major factor in encouraging businesses and consumers to shift from cash and cards to instant account-to-account payments. The new structure attempts to retain free access for everyday and small-value transactions while making larger commercial payments contribute towards the cost of maintaining the network.
The immediate impact will therefore fall primarily on larger merchants and businesses processing high-value UPI payments rather than on individual users. How merchants absorb the cost, whether businesses adjust payment strategies, and whether the new MDR affects transaction behaviour will become clearer after the framework takes effect on October 15. For consumers, however, the official position remains that UPI itself continues to be free for person-to-person payments and for standard merchant payments up to ₹2,000.
