India’s digital payments journey is now reaching an important stage. Over the past decade, the country has built one of the world’s largest real-time payments networks. This includes the growing use of smartphones, QR code-based merchant acceptance and person-to-person transfers.
Until now, the payments model on UPI has remained free. However, amid rising infrastructure costs and the need for fraud prevention, a new pricing framework has been introduced. Under this, a Merchant Discount Rate, or MDR, will apply on some UPI transactions.
Let us understand the new MDR charge on UPI in detail and know what its impact will be.
What’s Happening?
In a circular issued on 15 September 2026, the National Payments Corporation of India, or NPCI, said that merchants will have to pay 0.4% MDR on UPI payments above Rs 2,000. This charge will go to banks and payment processors, and the new structure will come into effect from 15 October 2026.
However, no charge will apply on person-to-person, or P2P, transactions, regardless of the transaction value. P2P transactions account for 37% of the volume and 70% of the value of total UPI transactions.
The charge will apply only on person-to-merchant, or P2M, transactions whose value exceeds Rs 2,000. All P2M transactions up to Rs 2,000, whether through UPI or RuPay debit card, will remain completely free. No charge will apply on auto-debits and UPI mandates either.
How Much Charge Will Apply on Which Transactions?
Under the new framework, different MDRs have been fixed for different transactions.
First, a standard MDR of 0.4% will apply on P2M transactions above Rs 2,000. For transactions of Rs 75,000 and above, this charge will be capped at Rs 300 per transaction.
Second, a flat MDR has been kept for essential sectors such as railways, telecom, insurance, fuel and agricultural inputs. A flat MDR of Rs 5 will apply on transactions above Rs 2,000. This also includes utility payments, fuel purchases, insurance premiums, rail tickets and several government services. The objective is to keep costs stable in essential public services and thin-margin industries.
The third slab is for the capital market. Payments made towards mutual funds, securities, stock brokers and dealers will attract 0.02% MDR, which will be capped at Rs 300.
Complete exemption has been given to small merchants. Merchants falling under the P2PM category, who receive up to Rs 1 lakh every month through UPI QR codes, will not have to pay MDR on any UPI transaction. This includes merchants such as vegetable vendors, tea shops and kirana stores.
Who Will Benefit from MDR?
According to the Finance Ministry, banks will not be able to pass on the MDR cost imposed on merchants to customers. At the same time, UPI app providers will not be allowed to levy platform fees or hidden charges. MDR is not a tax and will not be collected by the government or NPCI; instead, it will be shared among different partners in the payments ecosystem.
Of the 0.4% MDR, 0.28% will be the interchange fee, while the remaining portion will be shared between payment service providers and app providers. According to the government, continuous investment is needed for UPI operations, server bandwidth and fraud prevention.
Despite this, the 0.4% MDR is lower compared to the 1.5%–2.5% MDR on credit cards and up to 0.9% on debit cards. According to government data, only 4% of merchant transactions will be affected by MDR, while more than 95% of merchant transactions below Rs 2,000 will remain unaffected.
What Does This Mean for Investors?
For investors, the new MDR framework offers a new way of looking at the UPI ecosystem. Until now, the UPI model was based on subsidies. The new MDR will create a revenue stream for payment banks, acquiring banks and third-party app providers.
The government has also announced that 5% of total MDR collections will be set aside for a dedicated fund. This will be used to promote the use of UPI among small merchants.
This initiative also focuses on increasing UPI acceptance and bringing small businesses into the digital payments ecosystem. For companies linked to payment gateways, PSP services and merchant acquiring, the 0.4% MDR could become a new revenue stream. At the same time, due to the Rs 2,000 threshold and the monthly limit of Rs 1 lakh for small P2PM merchants, a large number of payments will still remain outside MDR.
What’s Next?
According to the Finance Ministry, the new MDR framework will help make UPI self-sustainable, provide incentives for expansion in rural and semi-urban areas, and maintain competitiveness. Banks also incur costs for cash handling, and many banks charge deposit fees. In this context, the 0.4% digital acceptance model could also remain cost-efficient for merchants.
The new model coming into effect from 15 October 2026 will determine how India’s digital payments ecosystem moves from a subsidy-based system towards a revenue-sharing model.
Disclaimer: This article is for educational and informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The companies mentioned are cited as examples within the context of market developments. Investors are advised to conduct their own due diligence and consult their financial advisor before making any investment decisions.
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