UPI Merchant Discount Rate: Who Pays, Who Is Exempt and Who Gains?

Why in News?

The National Payments Corporation of India has announced a Merchant Discount Rate framework for specified UPI merchant payments. It will take effect from October 15, 2026.

The transition period will allow acquiring banks, payment aggregators, fintech applications and corporate accounting platforms to update their billing and software systems.

The announcement followed the government’s exemption of UPI payments up to ₹2,000 and RuPay debit-card transactions from bank charges.

What Is Merchant Discount Rate?

Merchant Discount Rate, or MDR, is a fee paid by a merchant to the entities that facilitate a digital transaction.

These entities include:

• banks;
• payment-service providers; and
• third-party UPI applications.

MDR is deducted from the merchant payment and distributed among different participants in the payment ecosystem. It is not designed as a direct charge on the customer making the payment.

Types of UPI Transactions

Person-to-Person

• A P2P transaction is a transfer between two individuals, such as payments to friends, family members or personal contacts.

Person-to-Merchant

• A P2M transaction occurs when an individual uses UPI to pay a registered business for goods or services.

Person-to-Person-Merchant

• P2PM is a special category covering micro-merchants, such as street vendors, who receive UPI payments through QR codes into personal bank accounts within the prescribed monthly limit.

MDR Rate Structure

General Merchant Payments

• Mid-sized and large merchants receiving individual UPI payments above ₹2,000 will pay 0.4% of the transaction value.
• For a merchant payment of ₹75,000 or more, the levy cannot exceed ₹300.

Essential and Thin-Margin Sectors

A flat MDR of ₹5 will apply to eligible transactions of ₹2,000 or more in sectors such as:

• railways;
• telecommunications;
• insurance;
• fuel;
• electricity;
• water supply;
• piped gas;
• education; and
• agricultural inputs.

The fixed charge is intended to provide greater cost certainty to public services and businesses operating on narrow margins.

Capital-Market Transactions

• Payments involving mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02%, subject to a maximum of ₹300.
• The lower rate is intended to support retail participation in formal financial markets.

Which Transactions Are Exempt?

Individual Transfers

• All P2P payments will remain free irrespective of the value transferred.
• No transaction fee, platform charge or other levy can be imposed on individuals for sending or receiving money through UPI.

Automated Recurring Payments

Payments made through UPI Mandates or AutoPay will not attract MDR. These include:

• monthly utility bills;
• OTT subscriptions;
• recurring investments; and
• other standing instructions.

RuPay Debit Cards

• RuPay debit-card transactions have also been exempted from bank charges under the government’s announcement.

How Will Small Merchants Be Treated?

• Street vendors and other small merchants receiving up to ₹1 lakh per month through UPI QR codes into personal bank accounts will remain exempt under the P2PM category.
• They do not have to replace or re-register their existing QR codes.
• Banks and payment-service providers will use a transaction-velocity check to monitor the monthly inflow limit. A P2PM merchant receiving aggregate UPI credits exceeding ₹1 lakh per month for three consecutive months will be shifted to the regular P2M category.
• After this reclassification, individual merchant payments above ₹2,000 will attract the prescribed MDR.

Will Consumers Have to Pay?

• The government has maintained that customers will not directly bear MDR.

Banks have been advised to ensure that merchants do not pass the charge on to buyers. UPI applications are expressly prohibited from imposing:

• platform fees;
• hidden charges; or
• transaction fees on individual users.
• However, smaller or informal businesses may attempt to recover the charge through higher prices or encourage customers to pay in cash.
• NPCI has argued that merchants generally absorb nominal processing costs to gain higher business volumes. It has also stated that the UPI charge is significantly lower than card-processing charges and applies only above specified thresholds.

Why Has MDR Been Introduced?

Banks and other payment-system participants have so far borne the cost of operating UPI infrastructure.

The annual cost of maintaining the system is estimated at up to ₹20,000 crore. It covers:

• cloud storage;
• payment applications;
• transaction processing;
• security;
• settlement systems; and
• customer-support services.

The government’s position is that MDR revenue can support continued investment in digital-payment infrastructure.

Critics, however, argue that UPI provides wide public benefits and should continue as a no-cost digital public good. They fear that merchant charges could slow digital-payment adoption and encourage a return to cash.

Comparison with Card-Payment Charges

The basic UPI MDR is lower than conventional card-processing charges.

• UPI MDR: 0.4% on eligible merchant transactions
• Debit-card MDR: Capped at up to 0.90%
• Credit-card MDR: Generally between 1.5% and 2.5%

UPI also provides specific exemptions, reduced sectoral rates and a ceiling for high-value transactions.

How Widely Will MDR Apply?

• Different figures describe the MDR-eligible category because they use different denominators.

Share in Total UPI Volume

• P2P transfers constitute approximately 37% of all UPI transactions. Merchant payments up to ₹2,000 constitute another 60.5%.
• Together, these categories account for 97.5% of total UPI transaction volume and will remain free. Therefore, P2M payments above ₹2,000 represent only 2.5% of all UPI transactions by volume.
• The P2PM exemption makes the actual chargeable proportion still smaller.

Share in Merchant Payments

Within P2M transactions alone, payments above ₹2,000 accounted for:

• approximately 4% of merchant-payment volume in 2025–26; but
• nearly two-thirds of merchant-payment value.

Thus, high-value payments are few in number but account for a substantial share of the money transferred to merchants.

More than 24,000 crore UPI transactions, worth ₹314 lakh crore, were conducted during 2025–26.

How Will MDR Be Distributed?

The reported distribution of MDR among payment-system participants is as follows:

Who Stands to Gain the Most?

Banking Segment

• Yes Bank is the payer bank in more than 50% of UPI transactions. It is followed by ICICI Bank, with approximately 18.3%.
• Yes Bank is also the receiving bank in about 55% of transactions, followed by Axis Bank, with around 19%.
• Its presence on both sides of the payment chain places Yes Bank among the largest potential beneficiaries.

UPI Application Segment

Among third-party application providers:

• PhonePe processes approximately 46% of UPI transactions by volume.
• Google Pay processes nearly 32%.

Their market shares give them the largest potential benefit from the portion allocated to UPI applications.

Potential MDR Revenue

• In August 2026, UPI transactions totalled approximately ₹29.8 lakh crore.
• P2M transactions above ₹2,000 were worth around ₹5.99 lakh crore, representing approximately 20% of the value of all UPI transactions.

Applying 0.4% to the entire amount produces a theoretical maximum of:

• approximately ₹2,400 crore per month; and
• around ₹28,000 crore annually.

Actual revenue will be lower because of sectoral flat rates, lower capital-market charges, transaction caps, AutoPay exclusions and small-merchant exemptions.

Fund for Small-Merchant Adoption

• The government will create a dedicated fund to encourage UPI use among small merchants.
• An amount equivalent to 5% of total MDR collections will be contributed to the fund. However, it has not yet been specified whether this contribution will come from banks, application providers, Payment Service Providers or a combination of participants.

Key Concerns

Indirect Burden on Consumers

• Merchants may attempt to recover MDR through higher prices or by asking customers to use cash.

Impact on Digital-Payment Momentum

• If merchants discourage UPI payments above ₹2,000, the framework could affect the shift from cash to digital payments.

Concentration of Revenue

• A substantial part of MDR income may flow to a small number of banks and UPI applications because they dominate transaction volumes.

P2PM Reclassification

• Small merchants crossing the ₹1 lakh monthly threshold for three consecutive months will enter the regular merchant category, increasing their payment-processing costs.

Lack of Clarity About the Fund

• The participant responsible for contributing the additional amount equivalent to 5% of MDR collections has not been identified.

Way Forward

• Enforce the prohibition on platform fees and hidden consumer charges.
• Monitor whether merchants recover MDR through higher retail prices.
• Communicate P2PM eligibility and reclassification rules clearly.
• Ensure that small merchants are not required to replace functioning QR codes.
• Publish transparent data on MDR collections and their distribution.
• Clarify how the small-merchant adoption fund will be financed and used.
• Periodically assess whether MDR affects digital-payment use or increases cash transactions.
• Balance payment-system sustainability with UPI’s role as accessible digital public infrastructure.

Conclusion

The MDR framework seeks to provide revenue for maintaining UPI infrastructure while protecting individual users, small payments and eligible micro-merchants. Although only a small proportion of transactions by volume will attract the levy, they represent a significant share of merchant-payment value. Effective consumer protection, transparent revenue sharing and careful monitoring of merchant behaviour will determine whether the framework strengthens the digital-payment ecosystem without weakening financial inclusion.