India’s UPI payment system is entering a new phase. From October 15, 2026, a new Merchant Discount Rate (MDR) framework will apply to certain high-value merchant UPI transactions.
However, an important point is being missed in many discussions: this is not a new fee that ordinary UPI users will have to pay when sending money. Person-to-person UPI transfers remain free, and customers are not supposed to be charged MDR by merchants.
The new framework primarily affects merchants receiving certain UPI payments above ₹2,000.
What is MDR?
MDR stands for Merchant Discount Rate.
It is a fee associated with processing a digital payment to a merchant. The charge is distributed among participants in the payment ecosystem, including banks, payment service providers and UPI application providers.
The new framework does not mean that NPCI or the government will collect 0.4% from every UPI payment. MDR applies only to specified merchant transactions.
The government has also clarified that MDR is not a tax.
What are the new UPI MDR rates?
The new framework becomes effective October 15, 2026.
| Transaction type | MDR |
|---|---|
| Person-to-person UPI | 0% |
| Merchant payment up to ₹2,000 | 0% |
| Small merchant/P2PM covered by exemption | 0% |
| Normal merchant payment above ₹2,000 | 0.4% |
| Normal merchant payment ₹75,000+ | Maximum ₹300 |
| Railways, telecom, insurance, fuel above ₹2,000 | ₹5 per transaction |
| Capital-market transactions | 0.02%, capped at ₹300 |
The government says approximately 96% of merchant UPI transactions will remain unaffected by the new MDR framework.
Who will NOT pay MDR?
1. Person-to-person UPI payments
This is probably the most important clarification.
If you send money to another individual using UPI, there is no MDR, regardless of the amount.
For example:
- ₹500 to a friend: ₹0
- ₹5,000 to a family member: ₹0
- ₹50,000 to another person: ₹0
- ₹1,00,000 to another person: ₹0
There is no new 0.4% charge simply because the transaction exceeds ₹2,000.
The Finance Ministry has explicitly stated that P2P UPI transactions remain free irrespective of transaction value.
2. Merchant payments up to ₹2,000
UPI payments to merchants up to ₹2,000 remain free of MDR.
For example:
₹1,500 → restaurant
MDR = ₹0
₹2,000 → shop
MDR = ₹0
The threshold is important because the new MDR framework targets specified merchant transactions above ₹2,000.
3. Small merchants
There is also a zero-MDR framework for qualifying small merchants.
Small merchants receiving up to ₹1 lakh per month through UPI QR payments under the P2PM classification continue to receive zero-MDR treatment.
This is particularly relevant for:
- Street vendors
- Small grocery shops
- Local shops
- Small service providers
- Cab drivers
- Other micro businesses
The purpose is to prevent the new MDR framework from creating additional payment costs for small merchants.
Who will pay MDR?
The new MDR primarily applies to Person-to-Merchant (P2M) UPI transactions above ₹2,000, where the merchant does not fall under an applicable zero-MDR exemption.
For normal merchant transactions, the rate is:
0.4% of the transaction value
with a maximum MDR of:
₹300 per transaction
For example:
| Purchase | MDR |
|---|---|
| ₹2,000 | ₹0 |
| ₹3,000 | ₹12 |
| ₹5,000 | ₹20 |
| ₹10,000 | ₹40 |
| ₹20,000 | ₹80 |
| ₹50,000 | ₹200 |
| ₹75,000 | ₹300 |
| ₹1,00,000 | ₹300 |
At ₹1 lakh, 0.4% would normally be ₹400, but the ₹300 cap limits the MDR to ₹300.
What about fuel, telecom, insurance and railways?
Certain specified sectors have a different structure.
For UPI merchant payments above ₹2,000 involving:
- Railways
- Telecom
- Insurance
- Fuel
the MDR is ₹5 per transaction rather than the standard 0.4% rate.
For example:
₹10,000 fuel payment
Normal 0.4% MDR would be ₹40.
But because fuel is within the specified category:
MDR = ₹5
Will customers have to pay the 0.4%?
No.
This is one of the most important points.
The MDR is a merchant-side payment-processing charge. The government has stated that banks should ensure merchants do not pass the MDR onto customers.
UPI application providers are also prohibited from imposing platform fees or hidden charges on these transactions.
So if you purchase something for ₹10,000, the merchant should not tell you:
“₹10,000 + 0.4% UPI charge.”
The customer is not supposed to be charged the MDR separately.
Can I avoid UPI charges?
If you are an ordinary UPI customer, there is generally nothing you need to do.
Your P2P UPI payments remain free, and merchant payments up to ₹2,000 remain free.
If you are a merchant, however, your payment setup becomes important.
Method 1: Qualify for the small-merchant exemption
If your business qualifies for the P2PM zero-MDR framework and your UPI QR receipts remain within the applicable ₹1 lakh monthly threshold, the transactions can remain MDR-free.
However, merchants should not artificially split or misclassify transactions merely to avoid applicable charges.
Method 2: Use the appropriate payment category
Merchants should ensure their acquiring bank or payment provider has correctly classified their business and transactions.
For example, a qualifying small local merchant should ensure that its QR/payment account is correctly configured under the applicable small-merchant/P2PM framework.
Method 3: Do not confuse P2P with P2M
A common misconception is:
“If I send ₹10,000 using UPI, I will pay 0.4%.”
That is incorrect.
The important distinction is:
P2P: Person → Person
P2M: Person → Merchant
A ₹10,000 P2P transfer remains free.
A ₹10,000 qualifying P2M transaction can attract MDR at the merchant side.
What about splitting a ₹10,000 payment into five ₹2,000 payments?
This is not a recommended method to avoid MDR.
For example, deliberately doing:
₹2,000 + ₹2,000 + ₹2,000 + ₹2,000 + ₹2,000
instead of one legitimate ₹10,000 merchant transaction could violate the payment provider’s rules or result in the transaction being treated differently from the intended payment structure.
The ₹2,000 threshold should not be interpreted as an invitation to artificially split genuine purchases.
What about credit card UPI payments?
This is another area where people can get confused.
The new MDR framework discussed here concerns UPI merchant transactions. It should not automatically be interpreted as saying that every payment method connected to UPI has the same pricing structure.
Merchants should check the pricing applicable to their specific payment method, acquiring bank and payment provider.
The new framework also has separate provisions for capital-market transactions, which have a 0.02% MDR capped at ₹300.
Does this mean UPI is no longer free?
Not generally.
A better way to understand the change is:
UPI remains free for P2P payments and most everyday merchant payments, while a limited category of higher-value merchant transactions will now have an MDR.
The government says approximately 96% of P2M transactions will remain unaffected.
The new framework is therefore more accurately described as a limited merchant-side MDR framework, rather than a universal UPI transaction fee.
Why is MDR being introduced?
The government and NPCI have pointed to the increasing cost of operating and expanding the UPI ecosystem.
These costs include:
- Payment infrastructure
- Cybersecurity
- Fraud prevention
- Reliability
- Technology upgrades
- Customer support
- Expansion of UPI acceptance
The stated objective is to create a mechanism that helps support continued investment in the UPI ecosystem while protecting individuals and small merchants from additional charges.
Simple examples
Example 1: Sending money to a friend
You send ₹20,000 to your friend.
MDR: ₹0
Example 2: Buying groceries for ₹1,800
You pay a merchant ₹1,800 through UPI.
MDR: ₹0
Example 3: Buying a laptop for ₹50,000
You pay a normal merchant ₹50,000 through UPI.
0.4% of ₹50,000 = ₹200
The MDR is applicable on the merchant side.
Customer’s UPI charge: ₹0
Example 4: Paying ₹1 lakh to a normal merchant
0.4% of ₹1,00,000 = ₹400.
However, the MDR is capped at ₹300.
Merchant MDR: ₹300
Customer MDR: ₹0
Example 5: Paying ₹10,000 for fuel
Fuel falls within the specified sectoral category.
MDR: ₹5
Customer MDR: ₹0
What should merchants do now?
If you operate a business that accepts UPI payments, review your payment setup before October 15, 2026.
You should check:
- Which UPI QR/acquiring provider you use.
- Whether your business qualifies for the P2PM/small-merchant exemption.
- Your monthly UPI QR transaction value.
- Your merchant category code/classification.
- The MDR applicable to your business.
- Your settlement statements after the new framework begins.
- Whether your payment provider has introduced any separate contractual fees.
Do not assume that every payment provider will have identical commercial pricing beyond the regulatory MDR framework.
Bottom line
The headline “UPI will now have a 0.4% charge” is misleading if interpreted as a charge on every UPI user.
The actual framework is more specific:
₹2,000 or below to merchants: Free
P2P UPI: Free regardless of amount
Qualifying small merchants: Zero MDR
Normal merchant payment above ₹2,000: 0.4%, capped at ₹300
Railway/telecom/insurance/fuel above ₹2,000: ₹5
Capital-market payments: 0.02%, capped at ₹300
Customer paying MDR: No, MDR is not supposed to be passed to the customer.
The new framework is scheduled to take effect October 15, 2026.
Important: Because this is a newly announced framework, merchants should also verify the final NPCI/acquiring-bank implementation applicable to their particular merchant category before changing their payment strategy.
