On September 15, 2026, the National Payments Corporation of India (NPCI) announced through an official press release that a Merchant Discount Rate of 0.4% will be introduced on Person-to-Merchant UPI transactions above ₹2,000. The change takes effect from October 15, 2026, ending an era that began six years ago when the government made UPI completely free for merchants.
This is more than a fee announcement, it's a structural break from a policy that has defined India's digital payments story since January 2020, when the Modi government scrapped MDR on UPI entirely to accelerate adoption. In FY26 alone, UPI processed more than 24,000 crore transactions worth ₹314 lakh crore, making it the backbone of India's cashless economy.
What Is MDR — And What Exactly Is Being Levied
MDR is the fee merchants pay to the banks and payment intermediaries that process a digital transaction historically, up to 0.9% on debit cards and far more on credit cards. UPI's defining feature since 2020 has been that this fee was zero, subsidised instead by a government incentive scheme.
Under the new framework:
A 0.4% MDR now applies to person-to-merchant UPI payments above ₹2,000, capped at ₹300 per transaction for payments of ₹75,000 and above.
A ₹3,000 payment would attract roughly ₹12 in MDR; a ₹50,000 payment would attract about ₹200.
Person-to-person transfers and eligible small merchants continue to receive zero-MDR treatment.
Categories like railways, telecom, insurance and fuel get a flat fee of ₹5 instead of the percentage-based charge.
Small merchants receiving under ₹1 lakh a month via UPI QR codes are fully exempt, and on paper, roughly 96% of P2M transactions will be unaffected.
But volume and value tell different stories. Only about 4% of UPI transactions by count exceed ₹2,000, yet those transactions account for nearly 70% of UPI's total transaction value. So, the fee is narrow by transaction count but wide by rupee value, which is precisely where it's designed to bite.
Who Actually Pays
The charge is levied on merchants, not customers, and P2P transfers stay free regardless of amount. UPI app providers are explicitly barred from adding platform fees or hidden charges on top of the MDR. The government has been emphatic on this point: the Centre stated that customers will not bear the charge and that any attempt to pass it on to them would be illegal.
In reality, who actually pays the cost is not always clear. The rule against passing on charges does not set a specific penalty for every case. For example, if a merchant quietly adds ₹5–10 to a ₹3,000 bill, it can be very difficult to detect or prove that the extra amount is being charged as a UPI/MDR fee.
On distribution, NPCI's proposed split gives roughly 40% of the MDR pool to the issuing bank, 30% to the consumer-facing app, and 30% to the acquiring side — translating to roughly 16, 12 and 12 basis points respectively out of the 40 bps charged. A separate fund holding 5% of MDR collections is earmarked to support small merchants.
The 18% GST on MDR — Now Officially Confirmed
One important cost that has received less attention is the 18% GST on MDR. A senior Finance Ministry official has confirmed that GST will be charged on the MDR for UPI transactions above ₹2,000. Businesses that are registered under GST can claim this amount as Input Tax Credit (ITC), which can help reduce their overall tax liability.
However, there is a problem for some small sellers. Businesses with annual turnover below ₹40 lakh generally do not need to register for GST. But if an unregistered seller receives more than ₹1 lakh a month through UPI, the seller may not qualify for the small-merchant MDR exemption. This means such sellers could have to pay both MDR and 18% GST on the MDR, without being able to claim the GST back through ITC.
In simple terms, the additional cost looks like this: if a merchant receives a ₹10,000 UPI payment and the applicable MDR is 0.4%, the MDR would be ₹40. The merchant would then pay 18% GST on that ₹40, adding another ₹7.20. The total cost would therefore be ₹47.20. For a flat ₹5 MDR category, GST would add another 90 paise, taking the total to ₹5.90.
The Money Behind the Move
This is the part most coverage skips, and it's central to understanding why now.
What the government was spending vs. what the system actually costs: Government incentive payouts to banks for promoting UPI have fallen sharply from ₹3,631 crore in FY24, to ₹1,441 crore in FY25, to just ₹437 crore in FY26, even as transaction volumes kept growing 20-27% annually. Against that shrinking subsidy, industry estimates put the annual operating cost of the UPI and RuPay ecosystem at roughly ₹20,700 crore. A parliamentary Standing Committee on Finance found the gap stark: government digital-payment incentives between FY22 and FY25 covered only about 11% of the cost incurred by the industry, with the Centre paying a total of ₹8,730 crore over those four years.
NPCI's own numbers are also under pressure. NPCI's FY26 results showed revenue up 22% to ₹4,240 crore, but profit actually fell 32% to ₹989.4 crore, largely because of rising marketing and cashback spend even as it processes an at-cost public utility.
The projected new revenue pool is large. Estimates vary but converge in a similar range: analysts put the annual revenue pool at around ₹170 billion (~$1.7bn), split roughly 60% to banks, 25% to app providers and 15% to aggregators; Business Standard reported the MDR could add ₹15,000-20,600 crore annually to fintechs and banks combined; and Jefferies pegged industry-wide revenue potential at ₹150-180 billion, to be shared across issuers, apps, acquirers and banks.
Industry Reaction
The proposed UPI MDR has triggered a mixed response across the payments and retail ecosystem. While fintech leaders have highlighted the need to make digital payments financially sustainable, trader and retailer bodies have raised concerns over additional costs and the possibility of merchants shifting towards cash or other payment channels.
Speaking to DD News, Vijay Shekhar Sharma, Founder & CEO, Paytm, said, “It is a long-pending issue that everyone knew would eventually see some charge come in. I welcome the government’s decision to protect small shopkeepers. Introducing charges for larger transactions could help move the UPI ecosystem towards greater financial sustainability, while ensuring that small merchants continue to have access to free digital payments. I would describe this as a ‘Robin Hood’ approach, where the model protects small merchants while creating a more sustainable framework for UPI in the long term.”
Raising concerns over the proposed UPI charges and their potential impact on the adoption of digital payments, Ashneer Grover, Former BharatPe Co-founder, said during a TV interview with News18, “Why interfere with something that is already working? Free UPI is the only UPI. If you start charging for UPI, you risk pushing consumers and merchants back towards cash. Transactions above ₹2,000 may account for just 4% of the volume, but they represent 66% of the value. There is no logic in imposing a charge simply based on this threshold.”
Later, in a post on X, Ashneer Grover cited transaction data to further question the rationale behind imposing a Merchant Discount Rate (MDR) on UPI payments above ₹2,000.
Defending the proposed 0.4% MDR on eligible UPI transactions, PhonePe Founder and CEO Sameer Nigam told CNBC TV18, “I don’t expect merchants to move back to cash or split transactions to avoid the charge. Merchants already pay 1.7% to 2.25% on card transactions, while more than 95% of our UPI merchants also accept RuPay credit cards on UPI, where the cost is around 1.9% to 2%. Cash also has its own costs, including collection, processing and pilferage. Even a 0.4% MDR is significantly lower than existing card charges and, at India’s scale, can generate meaningful revenue to make digital payments more sustainable.”
Welcoming the government’s move and highlighting its potential to support the payments ecosystem, MobiKwik Co-Founder Upasana Taku, speaking to ANI, said, "It is a very positive step for India. UPI completed 10 years this year, and because of UPI, digital payments have scaled massively in India, with almost everyone using them. But as UPI has grown, the cost of maintaining the infrastructure has also increased, and banks and payment companies have struggled to support those costs. So, this new direction is very positive for the payments industry, banks, and payment companies."
Raising concerns over the potential impact on traders, Amit Gupta, General Secretary, New Delhi Traders Association, speaking to The Tribune, said, “The additional charge would make UPI payments a costly option for traders who are already operating on tight margins.”
Raising concerns about the potential impact on small merchants, Kumar Rajagopalan, CEO of the Retailers Association of India, said, “Small merchants will now think twice about whether to accept cash or UPI.”
Expressing concern over the timing of the proposed change, particularly as businesses enter the festive season, Santosh Katariya, President, Clothing Manufacturers Association of India, speaking to The Indian Textile Journal, said, “Introducing MDR on UPI at the start of the festive season could not have come at a more challenging time for the industry. Adding another cost to digital transactions at this juncture risks putting further pressure on an ecosystem that is still finding its footing.”
Expressing concern over the additional cost for traders, Nitin Gupta, President of the Kamla Nagar Market Association, speaking to The Tribune, said, “When the government introduced UPI payments, we supported it. Now if we are charged for UPI transactions as well, we will not support it and start promoting cash payments. Why should we pay transaction charges?”
Highlighting concerns among traders over rising transaction costs, Sanjiv Mehra, President, Khan Market Association, speaking to The Tribune, said, “Traders are already opposing MDR on credit card transactions, and now they will have to deal with a charge on UPI payments as well. For larger payments to wholesalers and other businesses, traders may also consider using cheques and other banking channels.”
Emphasising the need to protect UPI’s affordability and accessibility, Dhairyashil H. Patil, National President, All India Consumer Products Distributors Federation AICPDF, speaking to The Hindu, “UPI is one of India’s most significant technological achievements. Its success has come from simplicity, affordability, accessibility and universal acceptance, and these strengths must be protected. UPI is used by the entire economy, not just traders. If there is a need to recover the cost of maintaining this digital infrastructure, the burden should be shared across the ecosystem rather than falling primarily on merchants. The trader should not be penalised simply because he chooses to accept digital payments, especially when many businesses are already operating on extremely thin margins.”
Why This Could Backfire on the Government
Critics argue that the move could create both economic and political challenges, particularly because UPI’s zero-fee model has been a key part of the government’s Digital India narrative. Trader bodies have warned that introducing MDR, especially in markets such as Sadar Bazar and Chandni Chowk where UPI is widely used, could be seen as a setback to digital payments. There are also concerns that the additional cost could encourage some businesses to shift back to cash, split payments to remain below the ₹2,000 threshold, or use personal accounts to avoid the charge.
Another concern is whether the move could eventually open the door to similar charges on other digital payment instruments. At the same time, fintech observers have pointed to the ownership of major UPI platforms, with PhonePe majority-owned by Walmart and Google Pay operated by Google, raising questions over who could benefit from a new fee pool. These concerns have added to the debate over whether the move could create unintended consequences for merchants and the wider digital payments ecosystem.
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