UPI’s Six-Year Zero-MDR Era Ends: NPCI Sets 0.4% Fee on Merchant Payments Above ₹2,000
India’s Unified Payments Interface (UPI) is entering a new phase after the National Payments Corporation of India (NPCI) announced a Merchant Discount Rate (MDR) of up to 0.4% on specified person-to-merchant (P2M) transactions above ₹2,000. The new framework will take effect from October 15, 2026, ending more than six years in which merchants generally paid no MDR on UPI transactions.
The change does not mean consumers will start paying a UPI transaction fee. The government has specifically said that person-to-person payments will remain completely free, while merchant payments up to ₹2,000 will also remain free. The MDR is a charge within the payments ecosystem and is not a tax collected by the government or NPCI.
Under the new structure, a specified merchant transaction above ₹2,000 will attract an MDR of 0.4%, with the charge capped at ₹300 for transactions of ₹75,000 and above. The revenue will be distributed among participants in the payments ecosystem, including banks, payment service providers and UPI application providers.
The government says the impact will be limited because approximately 96% of UPI merchant transactions will remain outside the new MDR framework. Small merchants receiving up to ₹1 lakh per month through UPI QR codes under the specified small-merchant category will continue to enjoy zero MDR.
There are also special rates for particular sectors. Merchant transactions above ₹2,000 in areas such as railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat ₹5 MDR. Capital-market transactions, including payments relating to mutual funds and securities, will carry an MDR of 0.02%, capped at ₹300.
The decision follows months of debate over how to make UPI financially sustainable as transaction volumes have expanded dramatically. UPI processed about 24 billion transactions worth roughly $311 billion in August 2026 alone, according to Reuters, highlighting the enormous infrastructure required to operate the network at scale.
The government had already signalled a change in policy in August, when it said that a future MDR could apply to a limited category of higher-value merchant transactions while insisting that consumers would continue to use UPI without transaction charges.
The new system therefore represents a significant shift in how UPI is financed rather than the introduction of a general consumer payment fee. Since 2020, UPI merchant payments had operated under a zero-MDR model, with the ecosystem relying in part on government support and participants absorbing transaction-related costs.
The move is expected to create a new revenue stream for banks and payment companies. Reuters reported on September 16 that shares of several Indian payment and banking companies rose after the announcement, while Citi estimated that the new framework could create an annual revenue pool of ₹160 billion to ₹170 billion, although the eventual benefit will depend on transaction mix, exemptions and the distribution of MDR.
For merchants, however, the financial effect will depend heavily on the type and size of transactions they handle. A 0.4% MDR on a ₹10,000 payment would amount to ₹40 before the applicable sharing and ecosystem arrangements, while the government has said merchants cannot pass the MDR on to consumers through a separate UPI charge.
NPCI and the government have framed the change as a measure to strengthen the long-term sustainability of UPI and support spending on infrastructure, cybersecurity, fraud prevention and customer service. NPCI is also expected to establish a dedicated fund for expanding UPI acceptance among small merchants, with details to be worked out in consultation with the Reserve Bank of India.
The policy leaves the basic consumer proposition largely intact: sending money to another individual remains free, and ordinary merchant payments up to ₹2,000 remain free. The major change will be felt inside the merchant-payment ecosystem from October 15, when selected higher-value transactions begin generating a transaction-linked revenue stream for the banks, payment providers and other participants that operate UPI.
