The National Payments Corporation of India (NPCI) has introduced a 0.4% fee on person-to-merchant transactions exceeding Rs 2,000. Called Merchant Discount Rate (MDR), it is a charge that a merchant pays to a bank or payment service provider for processing a digital payment. Introduced under the Payment and Settlement Systems Act, 2007, the new MDR provision will come into effect from October 15, 2026. In an official press release, the government clarified that the new UPI framework will have “no impact on any person to person transactions”. “UPI will continue to remain completely free for all person-to-person transactions, irrespective of the amount transferred,” the release said. Instead, “the framework seeks to ensure the long-term sustainability of UPI while protecting individuals and small merchants from additional charges,” it stated.With the new framework coming into force next month, here’s what the government said about what UPI payments remain free, what has been included under the MDR provisions and whether UPI apps will start charging platform fees on UPI payments.
MDR on Person-to-merchant UPI payments above Rs 2,000: What will remain free
All Person-to-Person Transactions: All person-to-person (P2P) UPI transactions will remain completely free, irrespective of the amount transferred. No transaction fee, platform fee or other charge may be imposed on individuals for sending or receiving money through UPI. Therefore, UPI transactions accounting for 70% of the total transaction value will remain completely outside the MDR framework.Merchant Payments Up to Rs 2,000: All person-to-merchant (P2M) transactions up to Rs 2,000 will remain free of MDR. Customers will not be required to pay any charge when making such payments through UPI.Payments Received by Small Merchants: Small merchants including street vendors receiving up to Rs 1 lakh per month through UPI QR codes under the Person-to-Person-Merchant (P2PM) category will continue to enjoy zero MDR on all transactions. This provision will protect street vendors, neighbourhood shops and other small businesses from additional payment costs.
MDR on Person-to-merchant UPI payments above Rs 2,000: What will attract MDR
Merchant Transactions Above Rs 2,000: A nominal MDR of 0.4% will apply only to P2M transactions above Rs 2,000. The MDR will be shared among payment ecosystem participants, including banks, payment service providers and UPI application providers. For transactions of Rs 75,000 and above, the MDR will be capped at Rs 300 per transaction.Transactions in Essential Sectors: Transactions above Rs 2,000 in essential and thin-margin sectors, including railways, telecommunications, insurance, fuel and agricultural inputs, will attract a flat MDR of Rs 5 per transaction. The flat charge will provide cost certainty for critical public services and businesses operating on narrow margins.Capital Market Transactions: Payments relating to mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02%, capped at Rs 300 per transaction. The lower rate is intended to support continued retail participation in formal financial markets.
MDR on Person-to-merchant UPI payments above Rs 2,000: Customers will not pay MDR
MDR is a charge within the merchant payment ecosystem. It is not a charge on customers making UPI payments. In its official announcement, the government said that banks have been advised to ensure that merchants do not pass MDR charges on to customers. UPI application providers are expressly prohibited from imposing platform fees or hidden charges.Individuals will continue to have unlimited free usage, with no monthly quotas, volume restrictions or tiered caps on free UPI transactions. Daily transaction limits prescribed by banks and NPCI, generally ranging from Rs 1 lakh to Rs 5 lakh depending on the transaction category, are security and risk-management safeguards. They are not charging thresholds.
MDR on Person-to-merchant UPI payments above Rs 2,000: Most merchant transactions will remain unaffected
Data analysis indicates that MDR will apply to only about 4% of merchant transactions. This means that approximately 96% of merchant transactions will remain unaffected, as they are either below the Rs 2,000 threshold or covered by the zero-MDR framework for small merchants.The framework therefore protects individuals, micro-enterprises and small businesses while introducing a limited charge on larger merchant transactions.
When do the updated MDR provisions take effect
The finalized MDR framework and threshold structure take effect from 15th October 2026. This timeline gives acquiring banks, payment aggregators, fintech applications, and corporate accounting platforms adequate lead time to update their software engines and billing systems.
Will small-value UPI transactions be impacted
There is no impact on small-value UPI transactions up to Rs 2,000, which comprise more than 95% of the total volume of UPI (P2M) transactions. The intent of levying reasonable MDR is to ensure that UPI remains, accessible and convenient for everyday transactions while supporting long-term ecosystem sustainability.
Will UPI apps start charging platform fee on UPI payments
No, UPI App providers shall NOT charge Platform Fee or any other charge for any payment made through UPI. UPI applications are explicitly restricted from levying platform fees on UPI transactions.
Will I need to pay a fee when scanning a QR code at a local vendor
No, scanning QR codes at local markets, street vendors, or small retail shops will remain completely free for consumers. The customer-facing side of a QR transaction involves zero fees, regardless of the purchase amount. The policy has been engineered to protect daily micro-purchases like tea stalls, and local transport from any cost burden. Consumers can continue scanning QR codes with total confidence that no extra charge will be deducted.
Do small merchants need to upgrade or change their existing QR codes
No. Existing QR infrastructure will continue to function normally. Merchants do not need to replace, re-register, or alter their existing physical QR stands or soundboxes. All UPI QR codes currently displayed across shops will continue to process payments without interruption. Merchants can receive customer payments through their existing setups without visiting a bank branch or updating software.
What happens if a small merchant receives a payment above Rs 2,000
MDR applicability is determined by overall merchant account categorisation. Receiving a payment above Rs 2,000 does not impose a charge on a small merchant operating under exempted tiers like P2PM. A MDR of 0.4% will be introduced on Person-to-Merchant (P2M) UPI transactions above Rs 2,000/-. For transactions of Rs 75,000/- and above, the MDR will be capped at Rs 300 per transaction.
UPI AutoPay: No prescribed MDR charges
The government says that recurring payments made through UPI Mandates or AutoPay—such as utility bills, OTT subscriptions and mutual fund subscriptions—do not carry prescribed MDR transaction charges. Hence, they will continue to remain free of any fees.