UPI Payments Are Changing: Understanding the New 0.4% MDR for Merchants

India's UPI payment system is entering a new phase from October 15, 2026. The National Payments Corporation of India (NPCI) has introduced a revised Merchant Discount Rate (MDR) framework for selected merchant transactions, with a 0.4% MDR on eligible Person-to-Merchant (P2M) UPI payments above ₹2,000.

The change does not mean that UPI payments will suddenly become chargeable for everyone. Person-to-person payments remain free, UPI merchant payments up to ₹2,000 remain free, and qualifying small merchants continue to receive zero-MDR treatment. The government says approximately 96% of P2M transactions will remain unaffected.

Here's what merchants and businesses need to know about the new framework.

What Is UPI MDR?

MDR, or Merchant Discount Rate, is the fee associated with processing a merchant payment. Under the revised UPI framework, the fee applies to specified P2M transactions rather than ordinary transfers between individuals.

The standard rate for eligible merchant transactions above ₹2,000 is 0.4%, with the charge capped at ₹300 per transaction. The new framework takes effect on October 15, 2026.

The MDR is not a government tax. According to the government's clarification, the amount is distributed among participants in the UPI payment ecosystem, including banks and payment application providers.

Who Will Pay the 0.4% MDR?

The MDR applies on the merchant side of eligible P2M transactions.

Customers are not supposed to pay an additional UPI transaction charge. Banks have been advised to ensure that merchants do not pass the MDR on to customers, while UPI application providers are prohibited from imposing platform fees or hidden charges under this framework.

For example, if a customer purchases something worth ₹5,000 and pays through UPI, the customer still makes a ₹5,000 payment. The applicable MDR is handled within the merchant payment ecosystem.

When Does the New UPI MDR Apply?

The standard 0.4% MDR applies to specified P2M UPI transactions above ₹2,000.

The basic calculation is:

Transaction amount × 0.4% = MDR

However, the fee has a maximum limit of ₹300.

That means the percentage calculation stops increasing once the transaction reaches ₹75,000.

UPI MDR Calculation Examples

At ₹75,000, 0.4% equals ₹300. Any eligible transaction above that amount continues to have a maximum MDR of ₹300.

Are UPI Payments Below ₹2,000 Still Free?

Yes.

P2M payments up to and including ₹2,000 remain outside the standard MDR framework.

This is significant because low-value transactions make up the overwhelming majority of UPI merchant payment volume. Government data indicates that approximately 96% of P2M transactions will remain unaffected by the new framework.

So, a customer paying ₹500, ₹1,000 or ₹2,000 to a merchant through UPI will not trigger the new 0.4% MDR.

What About Person-to-Person UPI Payments?

There is no change to ordinary Person-to-Person (P2P) UPI transfers.

Whether someone transfers ₹500, ₹5,000 or another amount to a friend or family member, the new merchant MDR does not apply.

The government has specifically confirmed that P2P UPI transactions will remain free regardless of the amount transferred.

This distinction is important because the new framework applies to merchant payments, not all UPI transactions.

Small Merchants Can Continue With Zero MDR

One of the key provisions of the framework is the protection provided to small merchants.

Merchants operating under the Person-to-Person-Merchant (P2PM) framework and receiving up to ₹1 lakh per month through UPI QR payments can continue with zero MDR treatment. This includes businesses such as neighbourhood shops, street vendors and other small businesses.

A merchant being eligible for this small-merchant framework means that a payment above ₹2,000 does not automatically result in MDR.

The monthly merchant category therefore matters alongside the individual transaction amount.

What Happens If a Small Merchant Crosses ₹1 Lakh?

The framework also provides a mechanism for merchants whose UPI collections grow beyond the small-merchant threshold.

According to reporting on the framework, if a merchant's UPI collections exceed ₹1 lakh per month for three consecutive months, the merchant can be moved from the P2PM category to the regular P2M category.

For growing businesses, this makes it important to monitor monthly UPI collections rather than looking only at individual transactions.

Special MDR Rates for Essential Sectors

Not every eligible transaction above ₹2,000 uses the standard 0.4% rate.

Certain essential and thin-margin sectors receive a separate treatment.

For applicable transactions above ₹2,000, sectors including:

• Railways
• Telecommunications
• Insurance
• Fuel
• Agricultural inputs

will attract a flat ₹5 MDR per transaction instead of the standard 0.4% rate.

This means a ₹10,000 eligible transaction in one of these specified categories would not result in a ₹40 MDR under the standard calculation. The applicable charge would instead be ₹5.

Capital-Market Payments Have a Different Rate

Capital-market transactions also have a separate MDR structure.

Payments involving areas such as:

• Mutual funds
• Securities
• Stockbrokers
• Securities dealers

will attract an MDR of 0.02%, subject to a maximum of ₹300 per transaction.

This lower rate is separate from the standard 0.4% merchant MDR.

Will Customers Be Charged 0.4%?

No.

The new MDR is structured as a merchant-side payment-processing charge, not a direct fee imposed on the person making the UPI payment.

The government's clarification says banks have been advised to ensure that merchants do not pass MDR charges to customers. UPI application providers are also prohibited from imposing platform fees or hidden charges under the new framework.

For consumers, the main distinction is therefore:

Paying a merchant: MDR may apply on eligible transactions above ₹2,000.

Sending money to another person: The transfer remains free.

What Does the New MDR Mean for Merchants?

The impact will depend on a business's average transaction value and monthly UPI volume.

Consider a business that receives 1,000 eligible UPI payments of ₹5,000 each.

Its monthly UPI payment value would be:

1,000 × ₹5,000 = ₹50,00,000

At 0.4%, the MDR component would be:

₹50,00,000 × 0.4% = ₹20,000

The actual amount applicable to a business can differ depending on its merchant category, eligibility for exemptions and the specific transactions involved.

For businesses with a large number of high-value UPI payments, understanding the new MDR structure will therefore become part of payment-cost management.

Why Is UPI MDR Being Introduced?

UPI has operated with a zero-MDR structure for merchant transactions for several years as India encouraged the adoption of digital payments.

The revised framework is intended to create a more sustainable commercial model for the UPI ecosystem. The government says MDR collections will support areas such as payment infrastructure, cybersecurity, innovation and customer service.

The framework also includes a dedicated fund equivalent to 5% of total MDR collections to promote UPI adoption among small merchants and support wider acceptance, particularly in rural and semi-urban areas.

Where Does the MDR Money Go?

The MDR is not described as a government tax.

Instead, the collected amount is distributed among participants involved in the payment ecosystem, including banks, payment service providers and UPI application providers.

The stated purpose is to help fund the infrastructure and services required to operate and expand the UPI network.

What About UPI AutoPay?

The revised MDR framework does not introduce the standard 0.4% merchant MDR for UPI AutoPay in the same way as eligible high-value P2M transactions.

Recurring payments such as subscriptions and other AutoPay arrangements therefore remain under their applicable existing framework rather than being automatically treated as a standard 0.4% MDR transaction.

What Merchants Should Do Before October 15

Businesses accepting UPI payments can take a few practical steps before the new framework comes into effect.

Check Your Merchant Category

Find out whether your business falls under the regular P2M category, the small-merchant P2PM framework or one of the sectors with a concessional MDR.

Review Your Monthly UPI Collections

If your business is currently classified as a small merchant, keep track of monthly QR-based UPI collections and understand how crossing the ₹1 lakh threshold could affect your classification.

Analyse High-Value Transactions

Look at how many UPI payments your business receives above ₹2,000. This will provide a clearer picture of the potential impact of the new MDR.

Check Your Settlement Reports

Payment providers and acquiring banks may show MDR deductions separately in merchant settlement reports. Businesses should understand how the charge will appear in their statements.

Don't Add an Unauthorised UPI Fee

The MDR is not intended to become a separate customer-facing UPI charge. Merchants should follow the applicable rules and guidance from their acquiring bank and payment provider.

What Changes for Consumers?

For most consumers, the everyday UPI experience remains largely unchanged.

You can continue to:

• Send money to friends and family without MDR.
• Make merchant payments up to ₹2,000 without MDR.
• Use UPI without a monthly transaction quota imposed by the MDR framework.
• Make eligible high-value merchant payments without being directly charged the 0.4% MDR.

The important change occurs behind the scenes when an eligible merchant receives a payment above ₹2,000.

The Bigger Picture

​UPI processed 24 billion transactions worth around $311 billion in August 2026, according to Reuters, highlighting the enormous scale of the network. The new MDR framework comes as the ecosystem looks to establish a commercial model that can support continued investment while keeping everyday low-value payments accessible.

The government says only around 4% of merchant transactions will actually attract MDR, leaving approximately 96% unaffected.

That makes the new system more targeted than a blanket charge on UPI payments.

UPI MDR: Key Facts at a Glance