Key Details
The decision operationalises the framework covered by The Policy Edge in August, when an amendment to the Payment and Settlement Systems Act, 2007 opened the door to MDR on a limited category of merchant payments without fixing the rate or coverage.
Transaction | MDR treatment |
|---|---|
Person-to-person transfer | Zero, irrespective of value |
Merchant payment up to ₹2,000 | Zero |
Merchant payment above ₹2,000 | 0.4% |
Merchant payment of ₹75,000 or more | Capped at ₹300 |
Railways, telecom, insurance, fuel and agricultural inputs above ₹2,000 | ₹5 flat fee |
Specified capital-market payments | 0.02%, capped at ₹300 |
P2PM vendors receiving up to ₹1 lakh per month | Zero |
The government notified the zero-MDR threshold on 14 September 2026, followed by an NPCI circular on operational parameters and fee distribution on 15 September. UPI applications cannot levy platform or hidden charges on users.
The Enabling Provision Now Has a Pricing Structure
The August amendment created the legal authority to exempt specified electronic payments from charges and allowed a limited merchant MDR to be considered later. The latest notification and NPCI circular complete that process by specifying which UPI transactions will be charged and at what rate.
All person-to-person transfers remain free, including transactions above ₹2,000. MDR applies when a payment exceeding that threshold is made to an ordinary merchant outside the exempt or concessional categories.
The government estimates that only 4% of UPI merchant transactions by volume will be affected. Most transactions are below ₹2,000 or involve small merchants covered by the P2PM (Person-to-Person Merchant) framework.
Larger Commercial Payments Will Support the Network
Ordinary merchant payments above ₹2,000 will attract MDR at 0.4% of transaction value. The charge reaches the ₹300 ceiling at ₹75,000:
₹5,000 payment: ₹20
₹25,000 payment: ₹100
₹50,000 payment: ₹200
₹75,000 or more: maximum ₹300
The fee will be distributed among banks, payment-service providers and application providers involved in processing the transaction.
This introduces a commercial revenue stream into a payment system that has relied heavily on government incentives and cross-subsidisation. The policy seeks to make larger merchants contribute to infrastructure, security and service delivery while preserving free access for individuals and small businesses.
Small Vendors and Essential Services Receive Protection
Merchants receiving no more than ₹1 lakh a month through UPI QR codes under the Person-to-Person-Merchant classification will retain zero MDR. The exemption is intended to protect street vendors and other small businesses with limited margins.
Specified sectors—including railways, telecom, insurance, fuel and agricultural inputs—will pay a flat ₹5 per transaction above ₹2,000. These categories account for approximately 17% of merchant-payment volume and 46% of merchant-payment value, according to the government.
Payments to mutual funds, securities firms, stockbrokers and dealers will attract a lower rate of 0.02%, capped at ₹300.
Part of the Revenue Will Fund Wider Acceptance
A dedicated fund for promoting UPI among small merchants will receive 5% of total MDR collections. It is intended to expand acceptance and continued usage, particularly in rural and semi-urban areas.
The remaining collections will support participating payment institutions. How the revenue is divided among issuing banks, acquiring banks, applications and other service providers will shape whether the framework improves incentives across the entire network.
What Is Merchant Discount Rate (MDR)?
The Merchant Discount Rate is the cost associated with accepting a digital payment. It is charged on the merchant side and distributed among institutions that process the transaction. MDR is different from a fee imposed directly on the customer. A UPI payment can remain free for the payer even when the receiving merchant incurs a processing charge. Its practical effect will depend on whether merchants absorb the cost or reflect it in prices.
Policy Relevance
Implementation now turns on merchant classification. Banks and payment providers must correctly distinguish personal transfers, P2PM vendors, ordinary merchants and concessional sectors. Weak classification could impose charges on small businesses or allow larger merchants to avoid MDR.
Consumer protection also requires attention. Application providers are prohibited from imposing platform fees, but the release only advises banks to prevent merchants from passing MDR to customers. Checkout surcharges, differential pricing and refusal to accept UPI for larger purchases will therefore need monitoring.
The framework’s sustainability case should ultimately be judged by whether MDR collections produce measurable improvements in UPI reliability, fraud controls, dispute resolution and merchant acceptance — including transparent use of the 5% small-merchant fund.
Relevant Question for Policy Stakeholders: How will NPCI and RBI verify merchant classification and prevent customer surcharges while ensuring that MDR revenue strengthens UPI infrastructure and service quality?
Follow the Full Update Here: UPI Payments to Remain Free for Person-to-Person Transactions
Related Policy Edge Coverage: UPI to Remain Free for Users as Government Opens Door to Limited Merchant MDR