For years, UPI has underpinned a digital payments system in which transactions are quick, convenient and, for merchants, effectively free. From 15 October 2026, that model changes. For specified UPI merchant payments above ₹2,000, merchants will pay a Merchant Discount Rate (MDR) at 0.4 percent of the transaction value, capped at ₹300 per transaction.
The government has also barred merchants from passing the MDR on to customers. Enforcing this prohibition can prevent a separate UPI surcharge, but merchants could still recover some costs through general prices. Who pays the fee is therefore distinct from who ultimately bears its cost.
The more important question is who ultimately pays for India's digital payment infrastructure. India's new UPI pricing regime places that question at the centre of the debate.
How Low Is 0.4 Percent?
By comparison with many US credit-card fees, India's 0.4 percent MDR is relatively low. US credit-card interchange rates vary by card and merchant category, with many exceeding 1 percent before other merchant charges are included. The European Union caps interchange fees at 0.2 percent for consumer debit cards and 0.3 percent for consumer credit cards, but these caps do not cover the total cost of card acceptance.
Card fees provide context, but different services and cost structures limit the comparison. They do not, by themselves, establish whether India's 0.4 percent MDR is appropriate.
What Does 0.4 Percent Mean for Merchants?
The policy limits smaller merchants' exposure: those receiving up to ₹1 lakh a month through UPI QR payments under the P2PM category are exempt. The Finance Ministry estimates that 96 percent of merchant UPI transactions will remain unaffected because they are either within the ₹2,000 threshold or covered by the small-merchant exemption. This figure refers to transaction numbers, not transaction value.
Certain sectors have separate rates. Eligible payments above ₹2,000 in sectors including railways, telecommunications, insurance, fuel and agricultural inputs attract a flat ₹5 MDR; capital-market payments attract 0.02 percent, capped at ₹300.
DMart, one of India's largest grocery retailers, reported a net profit margin of 4.8 percent for the year ending March 2026. A 0.4 percent fee would therefore amount to about 8.3 percent of its net margin if applied across sales. For merchants with lower margins, the same rate could have a larger effect. The economic significance of the MDR will therefore depend on both the share of a merchant's sales subject to the fee and the margin available to absorb it.
Who Pays for a Payment System?
In January 2020, the government eliminated MDR on BHIM-UPI and RuPay debit-card transactions. It subsequently introduced incentives to support payment-system participants. Combined incentive payouts for UPI and RuPay rose from ₹1,389 crore in FY 2021–22 to ₹3,631 crore in FY 2023–24.
The Budget Estimate for the incentive scheme was ₹437 crore in FY 2025–26, subsequently increased to about ₹2,196 crore in the Revised Estimate. The Budget Estimate for FY 2026–27 is ₹2,000 crore.
In September 2026, National Payments Corporation of India (NPCI) Managing Director and CEO Dilip Asbe estimated UPI's annual cost to the banking system at around ₹21,000 crore, substantially above the government's incentive payments.
These costs suggest that some expenditure has been absorbed within the payment ecosystem. The new MDR changes this financing model by assigning part of that cost directly to merchants.
Alternate Models of Public Payment Infrastructure
Brazil's Pix, launched in November 2020, offers a different institutional model from UPI. Pix is operated by Brazil's central bank, which also sets the rules governing the system. A 2022 Bank for International Settlements study reported an average merchant cost of 0.22 percent per transaction, below India's proposed 0.4 percent MDR.
Thailand's PromptPay is another central-bank-led instant payment system. The World Bank highlights its integration into everyday public payments, including bill payments, government welfare transfers and tax refunds. Its role therefore extends beyond the merchant-payment use that dominates the current debate over UPI.
A New Financing Model for UPI
The 0.4 percent MDR therefore matters for what it signals: a shift in who finances India's digital payment infrastructure. As UPI moves from a model involving public support and costs absorbed within the payment ecosystem towards greater merchant contribution, assessing the policy requires more than comparing headline rates.
The relevant tests are the costs being recovered, how fee revenue is allocated, merchants' actual exposure and the effect on continued acceptance. A financing model that supports reliable infrastructure while sustaining merchant participation would strengthen UPI.