India’s Unified Payments Interface (UPI) is changing a key part of its pricing model from October 15, 2026, introducing a Merchant Discount Rate (MDR) on certain higher-value merchant payments.

Under the revised framework, eligible Person-to-Merchant (P2M) UPI transactions above ₹2,000 will attract an MDR of 0.4%. The charge will be borne within the merchant payments ecosystem, while consumers will continue to make UPI payments without a transaction fee.

The change marks a significant shift for a payment system that has operated for years under a zero-MDR model for ordinary UPI transactions.

What is Merchant Discount Rate?

Merchant Discount Rate is a fee associated with processing a digital payment. Merchants generally pay it to the acquiring bank and other participants involved in processing the transaction.

When a customer pays a business through a digital payment network, several entities can be involved, including the merchant’s bank, payment service providers and payment aggregators. MDR is the charge used within that ecosystem to account for those services.

The exact amount can vary depending on the payment method, merchant category, and applicable rules.

For UPI, the new framework introduces MDR specifically for certain merchant transactions rather than imposing a blanket charge on every UPI payment.

What changes on October 15?

From October 15, eligible P2M UPI payments above ₹2,000 will attract a 0.4% MDR.

Transactions up to ₹2,000 will remain outside the standard MDR framework. Person-to-person transfers will also remain free.

There is also a ceiling of ₹300 per transaction for payments of ₹75,000 or more. That means the percentage-based charge stops increasing once the transaction reaches the cap.

Here is how the standard rate works:

For example, 0.4% of a ₹1 lakh payment would normally be ₹400. However, because of the ₹300 ceiling, the applicable MDR would be limited to ₹300.

Will customers have to pay the UPI charge?

No. The revised framework keeps the charge away from the customer-facing side of the transaction.

Banks and payment ecosystem participants have been directed to ensure that merchants do not pass the MDR on to customers. Consumers therefore should continue to pay the listed purchase amount when using UPI.

That distinction is important because MDR is often described loosely as a “UPI fee.” It is technically a merchant-side payment-processing charge under the new framework, not a fee that users will see deducted from their bank accounts for making an eligible payment.

However, the broader economic effect could still depend on how businesses adjust their pricing and payment practices over time.

Which small merchants are exempt?

The new system includes a separate category for smaller businesses under the Person-to-Person Merchant, or P2PM, framework.

Eligible small merchants receiving up to ₹1 lakh per month through UPI QR payments directly into their bank accounts can remain outside the MDR regime.

The exemption is intended to protect very small vendors and businesses, particularly those in the informal and unorganised retail economy, from additional payment-processing costs.

The framework also provides for merchants that repeatedly exceed the threshold to move into the regular P2M category.

Are there special rates for some sectors?

Yes. Certain specified categories will not use the standard 0.4% MDR for transactions above ₹2,000.

Railways, telecommunications, insurance and fuel, among other designated categories, will face a flat MDR of ₹5 per qualifying transaction.

There is also a separate concessional rate for certain capital-market transactions. Payments involving areas such as mutual funds, securities, stockbrokers and dealers will attract MDR of 0.02%, subject to a ₹300 cap.

These special rates mean that the headline 0.4% div will not apply uniformly across every type of merchant payment.

How much of UPI will actually be affected?

The change does not apply to every UPI transaction.

According to the revised framework, about 96% of merchant transactions are expected to remain unaffected, largely because they are below the ₹2,000 threshold or fall within exempt small-merchant categories.

Person-to-person payments also remain outside the new MDR system.

That means consumers who primarily use UPI for everyday purchases, small payments or sending money to family members should see little immediate change in how they use the platform.

Why is UPI introducing MDR now?

The move comes after years in which UPI became one of the world’s largest real-time payment systems while maintaining a very low-cost experience for users.

NPCI data show that UPI processed about 24.51 billion transactions worth ₹29.82 lakh crore in August 2026.

The new MDR structure is intended to create a revenue stream for participants across the payment ecosystem and support areas such as payment infrastructure, cybersecurity and customer services.

Reuters reported that the framework is also designed to support continued expansion of UPI, including among smaller merchants and in underserved regions.

Could this eventually affect consumers?

Under the current rules, consumers are not supposed to be charged an MDR or a separate UPI payment fee.

The more indirect question is how merchants respond to the additional cost.

A business cannot simply add the prescribed MDR as a UPI surcharge under the framework. But businesses can make broader commercial decisions about pricing, discounts or which payment methods they encourage.

That does not mean consumers will necessarily pay more. It means the effect of the new MDR could extend beyond the transaction-level fee itself, depending on merchant behavior and competitive conditions.

For now, the clearest change is that higher-value eligible merchant transactions will carry a processing charge inside the UPI ecosystem, while UPI itself remains free for consumers under the new rules.