The reported UPI MDR rules will keep everyday digital payments free for consumers while reintroducing a fee on parts of the merchant-payment ecosystem from 15 October 2026. The change is significant because it attempts to solve a structural problem in India’s payments system: how to fund a platform that handles billions of transactions without weakening its affordability or excluding small merchants.
According to a report by Aaj Tak Business, the Department of Financial Services and the National Payments Corporation of India have issued a new Merchant Discount Rate framework for UPI payments. The report says the framework will not permit Google Pay, PhonePe, Paytm, BHIM or other payment applications to charge users a platform fee or hidden fee for sending money or paying merchants.
That distinction is central to understanding the policy. MDR is not described in the report as a charge paid directly by the customer. It is a fee associated with accepting digital payments and is paid by the merchant to banks and payment service providers. The reported framework therefore separates the consumer-facing price of UPI from the cost of operating the payment network.
This arrangement preserves UPI’s strongest public feature: a user can transfer money to another person without paying a transaction fee, while a customer buying groceries, fuel or other goods through a QR code is not expected to pay an additional amount. At the same time, the framework creates a new revenue channel for parts of the payments industry, particularly for larger merchant transactions.
The policy’s significance lies in this balancing act. Since January 2020, UPI MDR has been set at zero as part of the effort to expand digital payments. That decision helped make UPI attractive to consumers and merchants, but it also meant that banks, fintech companies and payment service providers had limited direct revenue from many transactions. The reported framework seeks to restore a charge in selected segments without making the customer the collection point.
### How the reported UPI MDR rules work
The framework described by Aaj Tak Business uses transaction value, merchant type and service category to determine whether MDR applies. Payments of up to ₹2,000 at a merchant are reported to remain outside the MDR charge. This covers a large share of routine transactions, including purchases at neighbourhood shops and many everyday retail payments.
For larger merchant payments, the report says an MDR of 0.4% will apply. A ₹3,000 transaction would therefore generate a reported merchant-side charge of about ₹12, while a ₹5,000 payment would generate a charge of about ₹20. The report also says that transactions of ₹75,000 or more will have a maximum MDR of ₹300, meaning the charge cannot rise beyond that amount even when the payment value is substantially higher.
Essential services receive a separate treatment under the reported framework. Railway tickets, fuel payments, insurance and telecom transactions are described as attracting a flat MDR of ₹5 for payments above ₹2,000 instead of a percentage-based fee. On a ₹50,000 insurance payment, for example, the reported merchant-side charge would remain ₹5.
The structure indicates that the policy is designed to protect low-value digital commerce while collecting revenue from higher-value transactions and specific service categories. It also attempts to prevent a large payment from producing an open-ended fee. These thresholds and caps are important because they determine which businesses bear the cost and whether the fee is material enough to influence payment behaviour.
### Small merchants are the main test
The most consequential exemption in the reported framework concerns small merchants and informal businesses. Vendors whose total monthly UPI QR-code receipts are up to ₹1 lakh are placed in a P2PM category, according to the report. For these merchants, MDR is reported to remain zero across transactions, including payments above ₹2,000.
This provision matters because QR-based payments have become part of the operating infrastructure of small retail. Vegetable sellers, tea stalls, small grocery shops and auto-rickshaw drivers often use UPI because it reduces the need for cash handling and allows customers to pay from a bank account or wallet-linked application. A fee imposed uniformly across these businesses could reduce the incentive to accept digital payments or encourage merchants to pass on the cost to customers.
The report says more than 96% of UPI merchant transactions are valued at ₹2,000 or less and that more than 95% of small and medium merchants will remain outside the MDR charge. These figures, as presented in the report, suggest that the new framework is intended to affect a relatively narrow segment of the market rather than everyday low-value commerce.
However, the operational question will be how merchant classification is determined and monitored. A monthly threshold requires payment providers and banks to identify the merchant category, track aggregate receipts and apply the correct rate. The framework’s practical effect will therefore depend not only on the announced rates but also on the accuracy of classification and the ability of small businesses to remain within the protected category.
### The cost of keeping UPI running
The policy also brings attention to the infrastructure behind a payment that appears instantaneous to the user. The report cites the costs of maintaining servers, operating the network continuously, preventing cyberattacks and addressing fraud. Banks and fintech companies have reportedly sought a mechanism to recover part of these costs after years of zero MDR on UPI transactions.
The issue is larger than a merchant commission. UPI depends on interconnected banks, payment applications, switching infrastructure, authentication systems and fraud-control processes. Each successful payment is the visible result of a wider network that must remain available, secure and capable of handling high volumes. The reported framework treats MDR as one way of creating revenue within that ecosystem while preserving the free consumer experience.
The report says 5% of the MDR collected will go into a development fund for strengthening digital payment infrastructure in smaller cities and rural areas. If implemented as described, that provision would connect revenue from larger urban and commercial transactions to network expansion in places where digital payment infrastructure may still require investment.
The report also cites estimates from global brokerage firms Jefferies and Bernstein that MDR on large merchant payments could create annual industry revenue of between ₹5,000 crore and ₹22,000 crore. These are estimates rather than reported realised collections, and the wide range indicates uncertainty about the size of the affected transaction base, merchant compliance and the final distribution of the fee.
### Why the consumer guarantee matters
The reported prohibition on passing MDR directly to customers is the framework’s most visible protection. A customer paying by UPI is not expected to pay an extra percentage merely because the payment method is digital. The report says that if a merchant demands additional money on this basis, the customer can complain to the bank or relevant authority.
Enforcement will determine whether that protection works in practice. A formal ban is clear, but customers must know where to complain, banks must record and investigate complaints, and payment providers must be able to identify repeated violations. Without an accessible enforcement process, the distinction between a merchant-side fee and a customer-side surcharge could become difficult to maintain at the point of sale.
The framework also creates a communication challenge. The word “charge” attached to UPI can generate concern even when the fee is not payable by the user. Clear display of payment amounts, receipts and complaint channels will be important for preventing confusion, particularly among consumers and small merchants who use QR payments without detailed knowledge of payment-system terminology.
### What remains to be watched
The reported UPI MDR rules represent a shift from a completely zero-MDR model towards a targeted cost-recovery system. They preserve free person-to-person transfers, protect low-value merchant payments and exempt small merchants within the stated monthly threshold, while placing a capped fee on selected larger transactions and essential services.
The evidence supplied in the report establishes the announced structure and its stated rationale, but it does not establish how the framework will perform after implementation. The key indicators will be whether consumers continue to pay no additional fee, whether small merchants remain protected, how accurately merchants are classified, how much revenue is generated and whether the proposed development fund improves digital-payment infrastructure beyond major cities.
The larger urban question is whether India can maintain universal, low-cost digital access while creating a sustainable financial model for the infrastructure that supports it. The reported framework answers that question by shifting part of the cost away from consumers and towards selected commercial transactions. Its success will depend on whether that shift remains invisible to ordinary users without becoming a new burden for the businesses that depend on UPI to operate.
