NPCI approves new MDR rules for UPI payments; UPI remains the cheapest option

UPI has become an integral part of the daily lives of many people, assisting in purchases ranging from milk and vegetables to online shopping. Consequently, questions have arisen regarding the impact of the upcoming introduction of commissions on UPI. The government has decided to implement a Merchant Discount Rate (MDR) on UPI, which will come into effect on October 15, 2026.

The Department of Financial Services (DFS) of the Government of India and the National Payments Corporation of India (NPCI) have released a new MDR structure for payments made via UPI. The primary concern among the public is the potential increase in costs when conducting digital payments.

For ordinary users who use UPI to purchase daily necessities such as groceries, milk, vegetables, rations, taxis, or make online purchases, UPI will remain completely free, as before. Peer-to-Peer (P2P) transfers between friends or relatives remain absolutely free, regardless of the amount, whether it is 100 rupees or 100 thousand rupees.

When paying in a store or on an online platform using a QR code scan or UPI ID, the customer will not be charged any additional fees. The government has given a clear directive that payment applications, such as Google Pay, PhonePe, Paytm, or BHIM, must not levy any hidden or paid charges on users for the platform.

MDR (Merchant Discount Rate) refers to a commission or fee that the merchant pays to banks and payment service providers (such as PhonePe, Paytm, Google Pay) for accepting digital payments. Previously, since January 2020, the MDR for UPI was completely zeroed out to stimulate digital payments. Now, however, the new rules stipulate its reintroduction.

For transactions up to 2000 rupees at any store or with a vendor, the MDR will be zero, meaning no charges for either the customer or the merchant. If the payment in a large store or mall exceeds 2000 rupees, the merchant will be charged an MDR of 0.4%. For example, for a transaction of 3000 rupees, the seller will pay approximately 12 rupees, and for a transaction of 5000 rupees, it will be 20 rupees.

A maximum MDR limit has been set for large enterprises: for payments of 75,000 rupees and above, the maximum charge is capped at 300 rupees, irrespective of whether the transaction is 100 thousand or 500 thousand rupees.

Small entrepreneurs, such as vegetable vendors, tea stall owners, small grocery stores, and taxi drivers, actively use QR codes. They have been provided with significant support. Small traders and sellers whose total volume of digital payments via QR code per month does not exceed 100,000 rupees have been assigned the P2PM category. For these sellers, the MDR will be completely zero (0%) for all transactions, even if they exceed 2000 rupees.

According to data, 96% or more of all merchant transactions via UPI in India are transactions of 2000 rupees or less. The government believes that over 95% of small and medium enterprises will remain outside the scope of this MDR charge.

For essential services such as train tickets, fuel stations, insurance, and telecommunications, a fixed MDR of 5 rupees has been established instead of a percentage charge. This means that if a user makes a payment via UPI exceeding 2000 rupees (for example, fueling a car for 2500 rupees or paying an insurance policy of 50,000 rupees), the merchant will only bear a fixed charge of 5 rupees. This specific rate stabilizes costs without passing on indirect burdens to consumers.

The government argues that the system processing billions of UPI transactions monthly requires enormous infrastructure. Round-the-clock server maintenance, protection against cyberattacks, and fraud prevention are costly processes. Banks and fintech companies have long demanded compensation for these expenses. These minor charges will strengthen the banking and fintech industry.

Five percent of the total collected MDR volume will be directed to a special development fund. This fund will be used to strengthen the network and infrastructure of digital payments in small towns and rural areas across the country. Although the government will not directly receive income from the introduction of the UPI commission, all revenue will be distributed among the digital payment ecosystem (banks, payment applications, and NPCI). Estimates from global brokerage firms Jefferies and Bernstein suggest that the introduction of MDR for large transactions will generate an annual revenue of approximately 500 billion rupees for the payments industry.

The government has announced the introduction of a Merchant Discount Rate (MDR) for payments made via UPI. At the UPI Steering Committee meeting held on September 15, it was decided that the UPI MDR for transactions exceeding 2000 rupees will be 40 basis points, or 0.4 percent. This means that merchants will have to pay 0.4% on payments exceeding 2000 rupees.

The new UPI MDR regulation will take effect for certain merchants (P2M) starting October 15, 2026. Meanwhile, customers will incur no costs. The commission will also not apply if the transfer is between UPI users.

Under the new rules, small merchants earning up to 100,000 rupees monthly through QR codes are exempt from paying MDR. For special categories such as railways and fuel, a fixed fee of 5 rupees will be charged for transactions over 2000 rupees, while for other higher-value P2M transactions, a 0.4% commission will apply, capped at a maximum of 300 rupees.

This implies that when making a personal payment to a merchant (P2M) exceeding 2000 rupees, the recipient will receive no more than 300 rupees in MDR. Furthermore, for fuel and diesel fuel, the MDR commission for the merchant via UPI will be a maximum of 5 rupees.

The new provisions stipulate that merchants receiving payments of less than 2000 rupees will not pay any commission, which accounts for 95% of all cases. Thus, this commission will only affect 5% of merchants. As part of this initiative, the government will establish a special fund to modernize digital payment infrastructure for small traders and Tier 3 markets.

The government explains the introduction of these norms by stating that UPI has become a very large system requiring funding for safe operation. Investments are necessary to prevent fraud, ensure cybersecurity, and facilitate continuous innovation. The government aims to create this fund by introducing MDR on UPI payments, as relying solely on government subsidies is impossible and unsustainable.