India’s UPI payment ecosystem is set for a change in the way certain merchant transactions are charged, with a revised Merchant Discount Rate (MDR) structure coming into effect from October 15. While the changes will introduce MDR on select higher-value merchant payments, consumers using UPI will continue to make payments without paying the charge themselves.
The National Payments Corporation of India (NPCI), through its latest clarification and FAQs, has outlined how the new framework will work and what it means for businesses, small merchants and everyday UPI users.
The upcoming changes are particularly relevant for merchants because the applicable MDR will depend on the transaction value as well as the category of the service being paid for. At the same time, NPCI has clarified that the introduction of MDR should not be interpreted as a new fee on UPI users. Merchants will not be permitted to pass the MDR on to customers, keeping the consumer-facing cost of UPI payments unchanged.
UPI Payments Will Continue to Be Free for Consumers
For consumers, the basic UPI payment experience will remain unchanged after October 15. Money sent to family and friends through UPI will continue to be completely free, while payments made to merchants will also not attract an additional charge for the customer, irrespective of the transaction amount. This applies across everyday payment situations, from purchases at retail stores and local markets to payments made by scanning a QR code at a street vendor.
The MDR is a charge associated with eligible merchant transactions and will be borne within the merchant-side payment ecosystem rather than being added to the customer's bill. This means a consumer paying a merchant through UPI will not have to pay an additional MDR separately, even when the underlying transaction falls into a category where MDR is applicable.
What the New MDR Structure Means for Merchants
The more significant impact of the revised framework will be on merchants processing eligible higher-value UPI transactions. Merchant payments of up to ₹2,000 will continue to attract zero MDR, ensuring that lower-value transactions remain outside the new charge structure. However, eligible merchant transactions above ₹2,000 will attract an MDR of 0.4%.
For very high-value transactions, the framework also provides a cap. Where the transaction value is ₹75,000 or above, the MDR will be capped at ₹300 per transaction. This creates a defined upper limit on the MDR applicable to such transactions rather than allowing the percentage-based charge to increase indefinitely with the transaction value.
The framework therefore creates a distinction between everyday lower-value UPI payments and eligible higher-value merchant transactions. While payments up to ₹2,000 continue with zero MDR, merchants handling qualifying transactions above that threshold will need to account for the applicable charge.
Small Merchants to Continue With Zero MDR
NPCI has also specifically addressed the impact on smaller businesses that rely heavily on UPI QR payments. Street vendors, neighbourhood shops and small businesses receiving up to ₹1 lakh per month through UPI QR codes in their bank accounts will continue to enjoy zero MDR.
This provision is intended to ensure that smaller merchants processing relatively modest volumes of digital payments are not brought into the MDR structure simply because they accept UPI. NPCI has stated that the framework will leave around 96% of merchant transactions free of MDR, keeping the majority of transactions outside the applicable charge.
For merchants operating at the local level, the monthly collection threshold therefore becomes an important factor in determining whether the new MDR structure will affect their UPI receipts.
Essential Services Will Follow a Separate Rate
The revised framework also provides a different MDR treatment for payments related to several essential services. For eligible transactions above ₹2,000 involving fuel, education, insurance, railways, telecom and utility services, including electricity, water and piped natural gas, the applicable MDR will be a flat ₹5 per transaction rather than the standard 0.4%.
Transactions below ₹2,000 in these categories will continue to attract zero MDR. As a result, merchants and service providers operating in these sectors will need to distinguish between transactions below and above the ₹2,000 threshold, while also accounting for the special fixed-rate structure applicable to qualifying higher-value payments.
What Changes From October 15?
The revised MDR framework essentially changes the way the cost of certain UPI merchant transactions is handled without changing the fundamental cost of UPI for consumers. Individuals will continue to send money to other users and make merchant payments through UPI without paying MDR, while eligible merchants processing higher-value transactions will face the applicable charge.
For merchants, the key factors to watch from October 15 will be the ₹2,000 transaction threshold, the 0.4% MDR for eligible transactions above that level, the ₹300 cap for transactions of ₹75,000 and above, and the zero-MDR provision for qualifying small merchants. Essential service providers will also need to account for the separate ₹5 MDR applicable to eligible payments above ₹2,000.
The clarification from NPCI is therefore aimed at separating the impact on merchants from the experience of consumers. While the commercial structure around select UPI merchant transactions is changing, UPI itself will continue to remain free for consumers under the framework outlined for October 15.
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