UPI has become one of the largest modes of digital payments in India. From small shopkeepers to large businesses, the use of UPI has increased rapidly. Now, to make this large payment system sustainable in the long term, Merchant Discount Rate or MDR is being applied to certain merchant payments.

From 15 October, a 0.4% MDR will apply to certain P2M, that is, person-to-merchant UPI transactions above Rs 2,000. However, small payments, P2P transfers and several services such as UPI AutoPay will remain free of charge as before. Separate rules have also been made for small merchants and some essential services.

Let us understand what the new MDR arrangement is, why the need for it was felt, and how its impact will fall on merchants, the stock market and customers.

What will change on UPI from 15 October?

Merchant Discount Rate or MDR is the fee paid by merchants to the banks, payment service providers and other participants that process digital payments. Under the new arrangement, from 15 October a 0.4% MDR will apply to specified P2M UPI transactions above Rs 2,000. The maximum limit of this fee has been kept at Rs 300. That is, MDR will increase with the rise in the payment amount, but after a fixed limit, it will not exceed Rs 300.

For example, on a payment of Rs 3,000, the MDR will be Rs 12, on Rs 10,000 it will be Rs 40, and on Rs 50,000 it will be Rs 200. On payments of Rs 75,000 or more, a maximum of only Rs 300 will be charged.

On the other hand, no MDR will apply on P2M transactions up to Rs 2,000. According to the latest framework, around 96% of P2M transactions will remain unaffected, as most transactions are either below Rs 2,000 or covered under the zero-MDR framework for eligible small merchants.

Why was the need for MDR on UPI Felt?

With the increase in the use of UPI, the cost of operating it has also risen. Running the UPI ecosystem costs around Rs 20,000 crore annually. This includes costs such as servers, bandwidth, fraud prevention, cloud storage, operation of payment apps and customer support.

Now the size of UPI has become quite large. In August 2026, 2,451 crore transactions took place on UPI, with a total value of Rs 29.90 lakh crore. In FY26, more than 24,000 crore UPI transactions took place and their total value was Rs 314 lakh crore. Looking at this large scale, the need for a sustainable revenue model for the UPI system has been felt.

One important point is that P2M transactions above Rs 2,000 form only about 4% of the volume, but in terms of value, their share is about two-thirds. That is, despite the number being small, a large amount of money is involved in these transactions.

The revenue received from MDR is intended to support UPI infrastructure, cyber security, innovation and merchant onboarding in small towns and rural areas.

Relief for Small Merchants

In the new arrangement, separate relief has been given to small businesses. Merchants who fall in the P2PM category and receive up to Rs 1 lakh per month in their account through UPI QR codes will not have to pay MDR. This can include businesses such as vegetable vendors, tea shops and small kirana stores.

Existing QR codes will also continue to work, and small merchants will not need to re-register. Banks and payment service providers will monitor the monthly limit of Rs 1 lakh through transaction checks. If any small merchant receives more than Rs 1 lakh every month for three consecutive months, they will move into the regular P2M category. After that, normal merchant rules will apply to them.

The purpose of this provision is to encourage small businesses to accept digital payments rather than placing an additional cost on them right from the beginning.

Flat MDR of Rs 5 for Essential Services

For some essential services, a flat MDR has been kept in place of the normal 0.4% rate.

In sectors such as railways, telecom, insurance, fuel, electricity, water, piped gas and agricultural inputs, only Rs 5 MDR will apply on transactions above Rs 2,000.

For example, on an insurance premium of Rs 50,000, the fee according to the normal 0.4% rate would be Rs 200. But in this special category, the MDR will remain only Rs 5. This will help in keeping the cost of digital payments limited in these sectors. This is especially important for those businesses where margins are relatively low or the payment amount is large.

Separate Rules for RuPay and Credit-linked UPI Payments

Payments made through RuPay debit cards will remain free of MDR irrespective of the amount. This will keep an additional option of digital payment available for both merchants and customers. On the other hand, UPI transactions linked to RuPay credit cards or pre-sanctioned credit lines will not come under the new 0.4% framework. Separate rules will apply to them.

This makes it clear that the new arrangement does not create a uniform fee model for all UPI payments. Different rates and rules have been kept on the basis of the type of payment.

0.02% MDR on Mutual Fund and Capital Market Payments

For payments linked to mutual funds, securities, stockbrokers and dealers, 0.02% MDR has been fixed. Its maximum limit will be Rs 300. This is much lower than the 0.4% rate for normal merchant payments. Its purpose is to keep digital payments related to investment and the capital market at a low cost.

For example, on a mutual fund payment of Rs 1 lakh, the MDR at the rate of 0.02% will be Rs 20.

In this way, even payments linked to large investments will not attract the normal merchant rate. An attempt has been made through this to promote transactions related to investment through digital channels.

No Change on P2P and UPI AutoPay

Person-to-person or P2P transfers will remain outside the new MDR arrangement. No fee will be charged on sending money to friends or family or transferring money to one’s own other bank account. UPI AutoPay and recurring payments will also remain free of MDR. This includes payments such as utility bills, OTT subscriptions and recurring investments.

P2P transactions form 37% of UPI volume and 70% of value. Therefore, keeping these transactions free of charge is important for maintaining the current usage of UPI. This means that there will be no change in the existing facility of sending money from person to person and automatic payments due to the new MDR arrangement.

No Permission to Pass the MDR cost on to the Customer

According to the Finance Ministry, under the new arrangement, a merchant cannot recover MDR directly from the customer. UPI app providers also cannot impose platform fees or hidden charges. If any merchant adds a separate UPI charge to the bill, it will be a violation of the rules. Banks have also been asked to monitor such cases.

18% GST will apply on MDR. For example, on a payment of Rs 10,000, the MDR will be Rs 40 and on this, Rs 7.20 GST will apply. Eligible GST-registered merchants can claim input tax credit, which can reduce their effective cost. However, for businesses with low margins, this will be an additional cost.

Who will receive the Money from MDR?

MDR will not be collected as a tax by the government or NPCI. It will be distributed among the different participants included in the payment ecosystem. These include banks, payment service providers and app providers involved in processing the transaction.

5% of the total MDR collection will go into a dedicated fund. This fund will be used to support small merchants and increase UPI acceptance in rural and semi-urban areas. The fund will also support merchant onboarding and digital payment infrastructure.

In this way, a portion of the revenue received from MDR will be used to increase the reach and capacity of the UPI ecosystem.

Conclusion

The new MDR arrangement is an important change in the revenue model of UPI. Its main objective is to make the UPI ecosystem sustainable in the long term by collecting revenue from large merchant payments. According to the framework, P2M transactions above Rs 2,000 form about 4% of the volume, but in terms of value, their share is about two-thirds. Therefore, the focus of the fee has been kept on transactions that are fewer in number but higher in value.

On the other hand, small merchants, essential services, P2P transfers, UPI AutoPay and some other payment categories have been given relief through separate rules. Now, after 15 October, the main thing to watch will be how merchants manage this additional cost in their business and how much support the revenue received from MDR provides to UPI infrastructure, cyber security and expansion into new areas.

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