New UPI Charges Explained: Who Pays MDR And What Remains Free

UPI payments will no longer remain free for everyone from October 15, when businesses begin paying a Merchant Discount Rate (MDR) on specified transactions above ₹2,000. Customers will not be charged directly, personal transfers will remain free and most small-value payments will stay outside the framework.

The change marks a partial departure from the zero-MDR regime introduced in 2020. Businesses covered by the new framework will pay a standard Merchant Discount Rate of 0.4%, subject to a ₹300 cap,

The regulatory change came in two steps. A September 14 Finance Ministry notification protected UPI payments up to ₹2,000 and RuPay debit-card transactions from charges, while the subsequent NPCI-led framework prescribed how larger merchant payments would be charged.

How Will The MDR Work?

The standard MDR will be 0.4% on person-to-merchant, or P2M, payments above ₹2,000. The fee will be deducted from the merchant receiving the money, not added directly to the customer’s UPI payment.

A shop receiving ₹3,000 will pay ₹12, while the charge on ₹10,000 will be ₹40. A ₹50,000 transaction will attract ₹200.

The MDR is capped at ₹300. This means payments of ₹75,000 or more will carry the same maximum charge. On a ₹1 lakh purchase, the percentage-based fee would normally be ₹400, but the cap will limit it to ₹300.

Payments of ₹2,000 or less will remain free.

What Will Continue To Carry No Charge?

Transfers between individuals will remain outside the MDR framework, regardless of their value. Sending ₹20,000 to a friend or family member will not attract a fee.

Small merchants placed in the P2PM category will also remain exempt. Those receiving up to ₹1 lakh a month through QR-code payments into their own accounts will pay no MDR, even when a single transaction exceeds ₹2,000.

A small merchant will move into the regular charging category only after crossing the monthly limit for three consecutive months.

UPI AutoPay mandates covering subscriptions, loan instalments, insurance premiums and utility bills do not carry a prescribed MDR under the framework.

The Finance Ministry has also said UPI applications are “expressly prohibited from imposing platform fees or hidden charges”.

Different Rates For Different Sectors

Railways, fuel, telecom services, insurance and public utilities will pay a flat ₹5 on UPI transactions above ₹2,000 instead of the standard percentage-based fee.

A railway booking worth ₹20,000, for example, will attract an MDR of ₹5 rather than ₹80.

Capital-market payments to mutual funds, brokers, securities dealers and investment platforms will face a lower rate of 0.02%, capped at ₹300.

The Demand For MDR

Banks and payment companies have argued that UPI cannot operate indefinitely without a sustainable source of revenue. The system requires continuing expenditure on servers, fraud detection, cybersecurity, dispute resolution and operational resilience.

UPI processed 2,451 crore transactions worth ₹29.9 lakh crore in August 2026, according to NPCI data cited in the information provided. The volume illustrates both its dominance in retail payments and the cost of maintaining infrastructure at that scale.

An official associated with the payments platform told The Indian Express that the new MDR structure could generate around ₹15,000 crore. This revenue is expected to be shared among banks, payment applications and merchant-payment service providers.

“In my assessment, it is a step towards magnificently changing everything. At the same time it has to be reasonable. Over a period of time, it has to change but this marks a step in the right direction,” the official said.

Before January 2020, merchant UPI transactions attracted MDR of up to 0.30%. The government then shifted UPI and RuPay debit-card payments to a zero-MDR regime to accelerate digital adoption.

Public subsidies subsequently covered part of the operating cost. The government paid ₹8,730 crore through its digital-payments incentive scheme between FY22 and FY25, according to The Indian Express. Incentives for eligible small merchants were capped at 0.15% of transaction value.

NPCI’s case is that subsidies should protect small merchants rather than finance the payment costs of large companies such as major e-commerce platforms. Those businesses already pay higher MDR on transactions made through Visa, Mastercard and American Express cards. Card-processing charges typically range between 1% and 3%, while debit-card MDR is capped at up to 0.90%.

Will Customers End Up Paying Indirectly?

The government has advised banks to ensure merchants do not pass MDR directly to customers. Enforcement may prove difficult because businesses remain free to set their prices.

Merchants could absorb the fee, incorporate it into the listed price or encourage customers to pay in cash. A business could also offer a cash discount equivalent to the UPI cost without displaying a separate digital-payment surcharge.

The ₹2,000 cut-off creates another potential problem. A merchant could divide a ₹5,000 bill into transactions of ₹2,000, ₹2,000 and ₹1,000 to remain below the threshold. Preventing systematic bill-splitting would require additional monitoring.