India
oi-Madhuri Adnal
For years, paying through UPI in India has been as simple as scanning a QR code, entering the amount and completing the payment. Customers did not pay a separate fee, while merchants could accept UPI without paying a percentage of the transaction value after Merchant Discount Rate (MDR) was made zero.
From October 15, that will change for some higher value merchant payments.
From October 15, India’s NPCI will apply a 0.4% Merchant Discount Rate (MDR) on UPI person-to-merchant transactions over Rs 2,000, capped at Rs 300, to fund payments infrastructure, while person-to-person and lower-value merchant payments remain free.
The National Payments Corporation of India (NPCI) has brought back a limited MDR of 0.4% for eligible person to merchant UPI transactions above Rs 2,000. The charge will be capped at Rs 300 for transactions of Rs 75,000 and above. Person to person payments will remain free, while eligible merchant transactions up to Rs 2,000 will remain outside MDR.
The charge will be borne by the merchant, not the customer. Merchants cannot pass it on to customers, and UPI apps cannot add a separate platform fee to these transactions.
For an eligible Rs 5,000 merchant payment, 0.4% works out to Rs 20. On a Rs 20,000 payment, it is Rs 80. Once the transaction reaches Rs 75,000, the charge is capped at Rs 300.
The change comes after years of zero MDR, during which the government and the payments industry used different mechanisms to support the cost of running and expanding the UPI ecosystem. It also comes at a time when UPI is processing volumes far beyond what it handled when zero MDR was introduced.
The cost of free UPI was being paid somewhere
Making UPI free for merchants did not mean that processing those payments came at no cost.
Banks, payment service providers and app providers still had to process transactions and maintain the technology and systems behind them. MDR was traditionally one way of recovering these costs.
Before zero MDR, the government had cited UPI P2M MDR of up to 0.30%. In January 2020, MDR was made zero for RuPay debit cards and BHIM UPI as part of the push to increase digital payments.
For merchants, particularly small businesses, this removed a direct cost from accepting digital payments. A shopkeeper could put up a QR code and accept UPI payments without having to account for a charge on every transaction.
The government subsequently used incentive schemes to support the payment ecosystem.
Government payouts under the incentive framework stood at Rs 1,389 crore in FY2021 22, Rs 2,210 crore in FY2022 23 and Rs 3,631 crore in FY2023 24. For FY2024 25, the Union Cabinet approved an incentive scheme with an estimated outlay of Rs 1,500 crore.
Taken together, the figures total Rs 8,730 crore when the FY2024 25 approved outlay is included. The distinction is important because Rs 1,500 crore was the approved allocation for that year, rather than an amount confirmed as spent.
The 2025 scheme was specifically aimed at keeping low value payments to small merchants free. It covered BHIM UPI P2M transactions of up to Rs 2,000 made to small merchants, with an incentive of 0.15% of the transaction value.
The incentive was paid through the acquiring bank, which is the merchant’s bank, and shared among participants in the payment chain, including the issuing bank, payment service provider bank and third party app providers.
The scheme also linked part of the incentive to performance. Eighty per cent of the admitted claim was to be paid without conditions, while the remaining 20% depended on technical decline rates and system uptime. The acquiring bank had to maintain a technical decline rate below 0.75% and system uptime above 99.5%.
UPI has grown far beyond its early adoption phase
UPI’s scale today is markedly different from the period when zero MDR was introduced.
In August 2026, UPI processed 24.5 billion transactions worth Rs 29.8 lakh crore. In August 2025, it had processed 20.01 billion transactions worth Rs 24.85 lakh crore. Average daily transactions in August 2026 stood at 790.6 million.
The growth is even more visible compared with August 2022, when UPI processed 6.58 billion transactions worth Rs 10.73 lakh crore, with average daily transactions of around 212.2 million.
The average transaction value, however, has fallen as UPI has become more widely used for everyday payments. The average UPI transaction size was around Rs 1,217 in August 2026, compared with Rs 1,242 in August 2025, Rs 1,489 in August 2023 and around Rs 1,630 in August 2022.
That is why the Rs 2,000 threshold matters. UPI is now handling hundreds of millions of transactions a day, but a substantial part of that activity continues to involve relatively small payments.
A Rs 300 payment and a Rs 20,000 payment are treated differently
The new MDR will apply according to the value and category of the transaction.
A Rs 300 grocery payment will remain outside MDR, as will a Rs 1,500 payment. An eligible Rs 5,000 payment, however, will attract the 0.4% merchant side charge.
There is also a separate provision for micro merchants under the specified P2PM category. Merchants receiving up to Rs 1 lakh a month through QR payments will continue to pay zero MDR regardless of the individual ticket size.
Certain sectors have separate rates. Fuel, utilities, insurance, telecom and railways carry a flat Rs 5 charge, while capital market transactions have an MDR of 0.02%.
This means the cost of accepting UPI will no longer be determined by one uniform rule. The applicable charge will depend on the transaction value, merchant category and sector.
Why 0.4% matters to merchants
For an eligible merchant, the charge can add up when a business handles a large number of higher value UPI payments.
A Rs 10,000 payment would mean Rs 40 in MDR, while a Rs 25,000 payment would mean Rs 100. At Rs 75,000, the charge reaches the Rs 300 cap and does not increase further for larger eligible transactions.
The 0.4% rate is also lower than several historical card MDR structures. The government has previously cited debit card MDR ceilings of up to 0.90%, while credit card transactions have generally carried higher charges.
The actual impact will depend on how much of a merchant’s UPI business comes from eligible transactions above Rs 2,000.
The Rs 2,000 threshold could create its own problems
The threshold also creates a new point of scrutiny for the payment ecosystem.
A merchant facing MDR on a Rs 3,000 payment could potentially split the transaction into smaller payments below Rs 2,000. Merchant categorisation will also become more important because the rules differ between small merchants, large merchants and specific sectors.
Enforcement will be important as well. Merchants cannot pass the MDR on to customers, so adding a separate payment charge to a customer’s bill would go against the new framework.
For years, one of UPI’s biggest advantages has been that customers could pay digitally without having to think about the payment method costing extra. The new MDR does not change that for consumers, but it does change the economics for merchants handling eligible higher value transactions.
How effectively the new merchant side rules are implemented will determine whether that distinction remains clear at the point of payment.
