The UPI system is entering a new pricing phase. Starting from October 15, 2026, certain transactions from individuals to merchants exceeding 2000 rupees will be subject to a Merchant Discount Rate (MDR) service fee. This fee is charged within the payment ecosystem when a merchant accepts a digital payment. This change has sparked discussions on how to maintain UPI's accessibility for merchants while creating a revenue stream for the banks and payment companies supporting the network.
The Ministry of Finance clarified that customers will not directly pay the MDR. Furthermore, this rule does not apply to peer-to-peer transfers or to small merchants who fall under the zero MDR system. Government estimates suggest that about 96% of individual-to-merchant transactions will remain unchanged.
Changes Under New UPI Charges
The standard MDR will be 0.4% for relevant merchant transactions exceeding 2000 rupees, capped at 300 rupees per transaction. The full limit of 300 rupees is reached at a transaction value of 75,000 rupees, after which the charge remains at this level for larger payments. Some sectors will pay a fixed fee. Railways, telecommunications, insurance, fuel, and agricultural resources will pay 5 rupees for relevant transactions over 2000 rupees. Payments in the stock market, including those related to mutual funds, securities, and brokers, will be subject to an MDR of 0.02%, capped at 300 rupees. Small merchants receiving up to 1 lakh rupees per month via UPI QR codes in the individual-to-merchant category will continue to benefit from the zero MDR regime. The government will also establish a special fund equivalent to 5% of the total collected MDR to incentivize UPI adoption among small merchants.
Reasons for Introducing UPI Commission
UPI has become one of India's most vital digital payment networks, but maintaining this network requires costs. In August alone, UPI processed approximately 24.5 billion transactions worth nearly 29.8 lakh crore rupees, highlighting the scale of the infrastructure that banks and payment companies must support. Banks, payment applications, and other service providers are forced to invest in cybersecurity, fraud prevention, technology, and network infrastructure as transaction volumes grow. The new MDR is intended to create a revenue stream without imposing direct charges on consumers or disrupting small payments. For selected sectors, the structure replaces the percentage MDR with a fixed fee of 5 rupees. The government stated that this fixed fee aims to provide greater cost predictability for vital and low-margin sectors. The potential revenue pool is significant. Citi estimates that the new system could bring between 16,000 to 17,000 crore rupees annually to the payment ecosystem, although the actual amount will depend on exceptions, transaction structure, and commission distribution methods. However, reactions from fintech leaders show that the economy is not that simple.
What Fintech Leaders Are Saying
Nitin Kamath, founder and CEO of Zerodha, questioned how the new MDR might work for the brokerage industry. In an X post, Kamath noted that a client can transfer money to a brokerage account without executing an actual trade. Consequently, the broker may incur payment costs without receiving anything from that transaction. He suggested that a 0.02% fee with a cap of 5 or 10 rupees would be more suitable for brokers. Kamath also warned that brokers may not be able to absorb additional costs indefinitely, potentially putting pressure on commission-free stock delivery models. Ashishkumar Chauhan, Managing Director and CEO of NSE, also pointed to a possible short-term impact. Speaking to reporters in the context of the upcoming NSE IPO, Chauhan stated that introducing MDR might initially reduce transaction volumes, though he expects activity to normalize over time. Samir Nigam, Co-founder and CEO of PhonePe, supported this structure. Speaking to ANI, Nigam stated that the payment industry suffered significant losses over six years while UPI operated without MDR. He argued that the new revenue could help the industry recover some operational costs and continue investing in the network, emphasizing that about 96% of merchant transactions will remain free.
In a separate interview with Moneycontrol, Nigam noted that the introduction of MDR could also bring PhonePe closer to filing for an IPO, as UPI monetization has been repeatedly raised in conversations with investors. Meanwhile, Ashnir Grover, former co-founder of BharatPe, questioned the necessity of charging merchants for UPI. In an X post, Grover doubted the need for MDR, arguing that UPI has already brought significant economic benefits to banks and the broader economy. He later reiterated his opposition in a Times Now interview, stating that merchants might ultimately pass these costs on to consumers.
There is another discussion happening behind the scenes: who will receive these funds. Business Standard reported in August, citing sources familiar with the discussions, that payment aggregators were seeking a fixed and direct share of any UPI MDR, rather than relying on acquiring banks to pass on part of the commission. Aggregators argue that they also bear costs for acquiring and servicing merchants, even if they are not direct members of the UPI network. Citi analysts suggest that banks could ultimately receive about 60% of the MDR revenue pool, payment applications about 25%, and aggregators 15%. These are analyst estimates, not an announced revenue distribution formula, and the final economics will depend on the evolution of the mechanism. The reactions highlight two underlying questions of the new system: how UPI should fund its growing infrastructure without making digital payments less attractive to merchants, and how this new revenue should be shared among the companies supporting the network?
What Happens Next
The Ministry of Finance stated that MDR is a merchant charge, and banks were advised to ensure that merchants do not pass it on to customers. UPI apps are also prohibited from imposing platform fees or hidden charges on users. Nevertheless, the real impact will only be clear after October 15, when the new structure comes into force. For consumers, everyday small UPI payments are expected to remain free. However, for merchants and payment companies, the economics of UPI are about to change. Thus, the next phase of UPI may be less about the speed of transaction growth and more about who pays for this growth, who receives the payment, and whether the economic conditions can work for everyone in the ecosystem.
