A new Merchant Discount Rate framework for UPI payments is set to take effect from October 15, introducing a 0.4% charge on certain direct merchant payments above ₹2,000.
The charge will be paid by merchants, while consumers will continue to pay the displayed transaction amount without a separate UPI fee.
What Is MDR?
Merchant Discount Rate, or MDR, is a fee charged for processing a digital payment made to a merchant. Under the new UPI framework, the MDR will be paid by the merchant receiving the payment, not directly by the customer.
For eligible direct UPI merchant payments above ₹2,000, the standard MDR will be 0.4%, subject to a maximum charge of ₹300.
Who Will Pay the New UPI Charge?
The new Merchant Discount Rate, or MDR, applies to direct Person-to-Merchant payments. Under the framework, the merchant accepting the payment will bear the charge.
A customer making a ₹3,000 purchase through direct account-to-merchant UPI will still pay ₹3,000. The merchant would incur an MDR of ₹12, calculated at 0.4%.
Merchants cannot pass this MDR directly to customers as a separate UPI charge. UPI application providers also cannot impose a platform fee or another charge on UPI payments under the framework.
Person-to-person transfers remain free regardless of the amount transferred.
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How Much Will Merchants Pay?
For regular merchant transactions covered by the 0.4% rate, the charge increases with the payment amount but is capped at ₹300.
A ₹3,000 payment would attract ₹12 in MDR, while a ₹50,000 payment would result in a ₹200 charge.
At ₹75,000, the 0.4% calculation reaches ₹300, which becomes the maximum charge. This means a ₹1 lakh transaction would also attract ₹300 rather than ₹400.
The charge applies to direct account-to-merchant UPI payments and should not be interpreted as an additional debit from the customer’s account.
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Will Everyday UPI Payments Be Affected?
Most routine merchant payments will remain outside the new MDR. Standard Person-to-Merchant transactions of ₹2,000 or less will not attract the charge.
More than 95% of UPI payments made to merchants are for ₹2,000 or less, so most everyday payments will not be affected by the new MDR. Payments such as ₹100 at a tea stall, ₹700 for groceries or ₹1,500 for a purchase will continue without any MDR charge.
The change becomes relevant for direct UPI payments to merchants above ₹2,000.
Are Small Shopkeepers Exempt?
Small merchants covered under the P2PM framework and receiving up to ₹1 lakh a month through UPI QR codes directly into their accounts will continue to have zero MDR.
A single payment above ₹2,000 does not automatically make such a merchant liable for the charge.
Eligibility depends on the merchant’s classification and monthly inward-payment threshold.
If a P2PM merchant receives more than ₹1 lakh through UPI for three consecutive months, the merchant will move into the P2M category.
Existing QR codes will continue to work, and small merchants do not need to replace or re-register them because of the new framework.
Which Payments Will Attract Only ₹5?
The standard 0.4% MDR will not apply uniformly to every category. Certain payments involving railways, telecom services, insurance and fuel will attract a flat ₹5 MDR for transactions above ₹2,000.
Electricity, water and piped natural gas payments above ₹2,000 will also attract a flat ₹5 MDR. Payments below the threshold will remain at zero MDR.
Capital-market transactions involving mutual funds, securities, stockbrokers, dealers and investment platforms will attract an MDR of 0.02%, capped at ₹300.
The framework is specifically for direct account-to-merchant UPI payments. Credit-linked UPI transactions, including RuPay credit cards linked to UPI and pre-sanctioned credit lines, remain governed by separate credit-product rules.
Can Merchants Charge Customers Extra?
Merchants cannot directly add the MDR to a customer’s bill as a separate UPI fee. If an item costs ₹3,000, a merchant cannot simply demand ₹3,012 because the customer chose UPI.
However, the framework does not determine how every business will respond to the additional processing cost. A merchant may absorb the MDR, accept a lower margin, reduce other costs or make broader changes to general pricing.
Any general price adjustment would be different from imposing a separate UPI surcharge on a customer.
The framework determines who directly pays the payment-processing charge, but it does not settle how individual businesses will manage that expense.
Why Is MDR Being Introduced?
The government says the UPI system has grown so much that it cannot continue depending only on government subsidies to cover its costs.
Running UPI, including servers, fraud-prevention systems, payment processing and bank technology, costs the industry around ₹20,000 crore every year.
The scale is huge. In August 2026 alone, UPI handled 2,451 crore transactions worth ₹29.9 lakh crore.
The government says revenue generated through MDR will remain within the UPI ecosystem and support infrastructure resilience, innovation, cybersecurity and customer service.
A dedicated fund has also been proposed to support digital-payment infrastructure and merchant onboarding in smaller towns and rural areas.
Its detailed framework is expected to be finalised in consultation with the Reserve Bank of India within three months.
The broader objective is to move UPI towards a commercial model capable of financing its infrastructure rather than depending entirely on government support.
What Should UPI Users Remember?
For most consumers, the immediate experience of using UPI will remain unchanged. Payments of ₹2,000 or less to merchants are unaffected, person-to-person transfers remain free, and customers cannot be charged a separate UPI fee by merchants under the framework.
For larger purchases, consumers should check the listed price and remember that the MDR is payable by the merchant, not added directly to their UPI transaction.
About the author — Ayesha Aayat writes on cybercrime, digital safety, and emerging online threats. Her work focuses on public awareness, legal clarity, and technology-driven risks.
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