UPI Enters a New Era
Selective MDR Introduced to Build a Sustainable Payment Ecosystem CS Parth Chourikar Associate - Research and Advisory, Taxmann
UPI Enters a New Era
Selective MDR Introduced to Build a Sustainable Payment Ecosystem CS Parth Chourikar Associate - Research and Advisory, Taxmann
Contents 1.
Introduction
5
2.
Why has MDR been introduced now?
5
3.
What exactly is changing?
6
4.
UPI is not becoming a paid service for consumers
6
5.
Why most UPI transactions will remain unaffected
7
6.
Small merchants remain protected
7
7.
The Rs. 300 cap makes high-value UPI payments more predictable
8
8.
Not every sector will follow the standard 0.4% rate
8
9.
Capital-market transactions receive a separate treatment
9
10.
The framework also seeks to strengthen the small-merchant ecosystem
9
11.
What does the change ultimately mean for UPI?
9
12.
Conclusion
10
1.
Introduction
For millions of Indians, making a UPI payment has become almost instinctive. A QR code is scanned, a PIN is entered and the payment is complete within seconds. Whether it is Rs. 50 paid to a neighbourhood tea stall or Rs. 50,000 paid for a larger purchase, the experience has remained remarkably similar. Most importantly, the customer has never had to think about the economics operating behind that transaction. UPI has simply been perceived as fast, convenient and free. But the apparent simplicity of a UPI payment masks an increasingly complex and expensive infrastructure operating in the background. Every transaction involves banks, payment applications, payment aggregators, servers, telecommunications infrastructure, fraud-monitoring systems, cybersecurity mechanisms and customer support. As UPI has grown into one of the world’s largest real-time payment systems, the question of who ultimately bears the cost of maintaining and expanding this infrastructure has become increasingly important. The answer is now beginning to take shape. A new Merchant Discount Rate (MDR) framework will introduce a 0.4% MDR on specified Person-to-Merchant (P2M) UPI transactions above Rs. 2,000, with the MDR capped at Rs. 300 for transactions of Rs. 75,000 and above. At the same time, the framework consciously keeps consumers, small merchants and low-value transactions outside the charge. The framework is scheduled to take effect from 15 October 2026, giving banks, payment aggregators, fintech applications and corporate accounting platforms time to make the necessary changes to their technology and billing systems.
2.
Why has MDR been introduced now?
The timing of the change is closely connected with the extraordinary scale that UPI has achieved. According to the FAQ, UPI processed 2,451 crore transactions with a total value of Rs. 29.9 lakh crore in August 2026 alone. At such a scale, UPI is no longer merely a convenient payment facility. It has become critical financial infrastructure supporting millions of consumers and businesses every day. Maintaining such infrastructure requires significant and continuing expenditure. The framework points to costs relating to server bandwidth, fraud prevention systems, payment operations and technical support provided by banks, with industry estimates placing the annual cost of maintaining UPI operations at around Rs. 20,000 crore. This brings out the fundamental policy dilemma. The absence of MDR was an important factor in making UPI attractive to merchants and encouraging widespread adoption. However, the very success of the system has increased the cost of maintaining it. A payment infrastructure handling billions of transactions cannot indefinitely depend on government support if it is expected to continuously invest in resilience, cybersecurity, fraud prevention and technological innovation. The new framework attempts to address this dilemma by asking higher-value commercial transactions to contribute towards the cost of the infrastructure, while keeping everyday digital payments largely untouched.
UPI Enters a New Era Selective MDR Introduced to Build a Sustainable Payment Ecosystem
5
3.
What exactly is changing?
The new MDR is not a universal charge on UPI transactions. It applies primarily to specified Person-to-Merchant transactions above Rs. 2,000. Transactions up to Rs. 2,000 remain outside the MDR framework, while transactions of Rs. 75,000 and above are subject to a maximum MDR of Rs. 300. The economics become clearer when the numbers are applied. A Rs. 3,000 transaction would attract MDR of Rs. 12 at 0.4%, while a Rs. 50,000 transaction would attract Rs. 200. In the case of a Rs. 1,00,000 transaction, the 0.4% calculation would ordinarily produce an MDR of Rs. 400, but the Rs. 300 cap would apply instead. The cap therefore becomes increasingly significant as transaction values rise. Transaction value
MDR at 0.4%
Actual MDR payable
Rs. 2,000
Rs. 8
Nil
Rs. 3,000
Rs. 12
Rs. 12
Rs. 50,000
Rs. 200
Rs. 200
Rs. 75,000
Rs. 300
Rs. 300
Rs. 1,00,000
Rs. 400
Rs. 300
This threshold-based structure reflects a deliberate policy choice. Rather than imposing a cost on every UPI payment, the framework seeks to preserve the economics of everyday digital payments while introducing a modest contribution from larger commercial transactions that are more capable of absorbing payment-processing costs.
4. UPI is not becoming a paid service for consumers Perhaps the biggest potential source of confusion is the distinction between MDR and a consumer transaction fee. The introduction of MDR does not mean that individuals will have to pay for using UPI. Person-to-Person transactions will continue to remain free, irrespective of the amount transferred. Similarly, customers making merchant payments up to Rs. 2,000 will not face MDR. The framework also provides that UPI application providers cannot impose a platform fee or any other charge on UPI payments. The PIB release reinforces this position by clarifying that MDR is a charge within the merchant payment ecosystem and is not a charge imposed on customers making UPI payments. Banks have also been advised to ensure that merchants do not pass the MDR on to customers. Therefore, if a consumer purchases goods worth Rs. 10,000 and pays through UPI, the consumer continues to pay Rs. 10,000. The MDR, where applicable, operates within the merchant-side payment ecosystem and is not presented to the customer as an additional charge. This distinction is critical because the success of UPI has been built on the consumer’s perception that digital payments are simple and frictionless. The new framework attempts to preserve that experience even while changing the economics underneath it.
6
UPI Enters a New Era Selective MDR Introduced to Build a Sustainable Payment Ecosystem
5.
Why most UPI transactions will remain unaffected
The policy has been designed to limit the impact of MDR to a relatively small portion of the merchant transaction ecosystem. The FAQ states that P2M transactions up to Rs. 2,000 constitute more than 95% of total P2M transaction volume. The PIB release, using its own transaction analysis, states that MDR will apply to approximately 4% of merchant transactions, meaning approximately 96% of merchant transactions will remain unaffected because they either fall below the Rs. 2,000 threshold or are covered by the zero-MDR framework applicable to small merchants. Category
Position under the framework
P2P transactions
Remain free
P2M transactions up to Rs. 2,000
No MDR
Eligible P2PM small merchants
Zero MDR
Approximately 96% of merchant transactions
Expected to remain unaffected
Specified higher-value P2M transactions
MDR applicable
The two statements should be understood in their respective contexts, since one refers specifically to P2M transaction volume while the other refers to merchant transactions generally. Nevertheless, they establish the central design principle of the framework: MDR is intended to affect the higher-value segment of merchant payments rather than becoming a universal cost attached to UPI.
6. Small merchants remain protected The protection extended to small merchants is another important component of the framework. Small merchants operating under the Person-to-Person-Merchant (P2PM) framework will continue to enjoy zero MDR. The FAQ describes P2PM as a specialised category intended for small vendors receiving UPI payments directly into their bank accounts, with an inward transaction threshold of up to Rs. 1 lakh per month. This is particularly relevant for India’s informal and small-business economy. For a large enterprise, a payment-processing charge of a few basis points may be a relatively manageable operating cost. For a small street vendor, neighbourhood shop or microbusiness operating on thin margins, even a small deduction from every digital payment could discourage the acceptance of digital payments altogether. The framework therefore seeks to ensure that the move towards commercial sustainability does not come at the expense of financial inclusion. Importantly, MDR applicability for such merchants is linked to their merchant classification rather than simply to the value of an individual transaction. Thus, a P2PM merchant receiving a single payment above Rs. 2,000 does not automatically become liable for MDR merely because that particular transaction crosses the threshold.
UPI Enters a New Era Selective MDR Introduced to Build a Sustainable Payment Ecosystem
7
At the same time, the framework provides a mechanism to prevent larger businesses from indefinitely retaining the benefits intended for micro-merchants. Acquiring banks and payment service providers will monitor inward UPI transactions, and merchants receiving more than Rs. 1 lakh per month for three consecutive months may be transitioned from the P2PM category to the P2M category. The approach therefore attempts to draw a practical line between genuine micromerchants and businesses operating at a larger commercial scale.
7.
The Rs. 300 cap makes high-value UPI payments more predictable
The cap of Rs. 300 is particularly important for larger transactions. Without the cap, a 0.4% MDR would continue increasing proportionately with the value of the transaction. Under the new structure, however, the MDR becomes fixed at Rs. 300 once the transaction reaches Rs. 75,000. For instance, while a Rs. 50,000 payment attracts Rs. 200, a Rs. 1,00,000 payment attracts only Rs. 300 instead of Rs. 400. The effective MDR therefore falls as the transaction value increases beyond the cap threshold. This provides large merchants with greater predictability over payment-processing costs and also preserves UPI’s competitiveness for high-value digital transactions. The comparison with traditional payment instruments reinforces this point. The FAQ states that standard credit-card MDRs typically range from 1.5% to 2.5%, while debit-card MDR can be as high as 0.90%. Against this, the baseline UPI MDR of 0.4%, coupled with the Rs. 300 cap, continues to position UPI as a relatively low-cost digital payment acceptance mechanism. Thus, the relevant question for a merchant is not merely whether UPI now carries a cost, but how that cost compares with the alternatives available for accepting digital payments.
8. Not every sector will follow the standard 0.4% rate The framework also recognises that a uniform MDR may not be appropriate across all industries. Certain sectors, including railways, telecommunications, insurance and fuel, among others, will be subject to a flat MDR of Rs. 5 per transaction for transactions above Rs. 2,000 instead of the standard 0.4% rate. This concession can become particularly meaningful for high-value transactions. For example, a Rs. 10,000 insurance premium would attract Rs. 40 under a 0.4% structure, whereas the concessional rate would limit the MDR to Rs. 5. The same approach applies to fuel transactions above Rs. 2,000, which attract a flat Rs. 5 MDR. Payments below Rs. 2,000 continue to remain outside the MDR framework. The policy therefore acknowledges that payment economics can differ significantly across industries. A percentage-based charge that may be reasonable for a general commercial transaction may have a disproportionate impact on essential services or businesses operating on relatively thin margins.
8
UPI Enters a New Era Selective MDR Introduced to Build a Sustainable Payment Ecosystem
9. Capital-market transactions receive a separate treatment The framework goes further by creating a distinct MDR structure for capital-market transactions. Payments relating to mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02%, subject to a maximum cap of Rs. 300. The significantly lower rate appears designed to avoid creating unnecessary friction in formal financial-market participation. A Rs. 1 lakh capital-market transaction, for example, would generate MDR of only Rs. 20 at the 0.02% rate. The differentiation is important because UPI is increasingly being used for more than retail purchases. It has become part of a wider financial ecosystem that includes investments, insurance, utility payments and other financial services. The MDR framework therefore attempts to recognise the distinct nature of these transactions rather than applying a single commercial rate indiscriminately.
10. The framework also seeks to strengthen the small-merchant ecosystem An interesting feature of the policy is that the revenue collected from larger merchant transactions is not intended merely to compensate payment-system participants. A dedicated fund is proposed to support digital payment infrastructure and adoption among small merchants, particularly in Tier 3 to Tier 6 centres, the North-Eastern States, Jammu & Kashmir and Ladakh. The framework also contemplates support for notified government schemes such as PM SVANidhi and PM Vishwakarma. The PIB release states that an amount equivalent to 5% of total MDR collections will be contributed to this fund. The objective is to support wider UPI acceptance, sustained usage and the inclusion of small businesses in India’s digital payments ecosystem. This creates an interesting economic cycle. Larger commercial transactions generate revenue within the payment ecosystem, a portion of which can then be directed towards expanding digital payment infrastructure among smaller businesses and underserved regions. In that sense, the framework is not merely about monetising UPI. It is also about creating a mechanism through which the more commercially viable parts of the ecosystem can help finance continued expansion of digital payments.
11. What does the change ultimately mean for UPI? The most important way to understand the new framework is to view it as a transition from adoption economics to sustainability economics. For years, the primary objective was to get consumers and merchants onto the digital payments network. Zero MDR was an effective tool for achieving that objective. It removed friction for merchants, encouraged QR-code adoption and allowed consumers to develop the habit of paying digitally.
UPI Enters a New Era Selective MDR Introduced to Build a Sustainable Payment Ecosystem
9
But UPI has now reached a scale where the policy challenge has changed. India is no longer trying merely to persuade people to use digital payments. It must ensure that the infrastructure supporting those payments remains resilient, secure and capable of handling ever-increasing volumes. That requires continuous investment. Cybersecurity threats evolve. Fraud patterns change. Transaction volumes increase. Banks and payment providers need to upgrade technology. Payment infrastructure needs to remain available even during periods of extraordinary demand. The new MDR framework is therefore an attempt to create a sustainable economic foundation without undermining UPI’s core proposition. The key changes can be viewed together: Aspect
Position under the new framework
Consumer UPI payments
No charge
P2P transactions
Remain free
Merchant payments up to Rs. 2,000
No MDR
Eligible P2PM merchants
Zero MDR
General P2M transactions above Rs. 2,000
0.4% MDR
Transactions of Rs. 75,000 and above
MDR capped at Rs. 300
Capital-market transactions
0.02%, capped at Rs. 300
Specified essential sectors
Flat Rs. 5 MDR above Rs. 2,000
Passing MDR on to customers
Not permitted
UPI app platform fee
Not permitted
Existing QR infrastructure
Continues to function
12. Conclusion The significance of the new UPI MDR framework therefore cannot be captured simply by saying that “UPI will now attract a charge”. The more important development is that India is beginning to put a commercial sustainability model around one of its most important pieces of digital public infrastructure. UPI’s first phase was about scale. It was about making digital payments so simple and accessible that a street vendor and a multinational retailer could use the same underlying payment infrastructure. The next phase is about sustainability. The challenge is to ensure that the network remains affordable enough to preserve mass adoption, while generating sufficient economic value to fund the infrastructure, cybersecurity, innovation and operational capacity required to support it. The new framework attempts to strike that balance by keeping the ordinary consumer outside the MDR mechanism and protecting the smallest merchants, while asking larger commercial transactions to make a modest contribution. In other words, UPI is not becoming expensive. It is becoming economically structured. And that may be the more important story behind the 0.4% number.
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UPI Enters a New Era Selective MDR Introduced to Build a Sustainable Payment Ecosystem
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