All you need to know about MDR on UPI payments

The introduction of a 0.4% merchant discount rate (MDR) on UPI transactions above Rs 2,000 has stirred the hornet’s nest, sparking fierce debates in the fintech industry and the ecosystem at large.

While some stakeholders, including PhonePe’s Sameer Nigam, have said MDR is needed for the long-term growth and sustainability of the UPI ecosystem, some others are pushing back on the move, fearing it would undo all the progress the free digital payment system has achieved so far.

What does MDR mean? What impact does it have on merchants? Who pays and how much? Should you be worried as a consumer? 

Here is the complete lowdown.

What is MDR?

MDR (merchant discount rate) is a fee a business (merchant) pays to a bank, payment service provider, or payment processor for accepting digital payments like credit cards, debit cards, and UPI going forward.

Why is MDR in the news?

On Tuesday, the Government of India announced an MDR of 0.4% on merchant transactions above Rs 2,000 made via UPI. This effectively draws the curtain on the zero-MDR regime, which was introduced to drive digital payments adoption in the country.

MDR has been zero for UPI and RuPay debit card transactions since 2020. This will change from October 15, 2026, when the new UPI rules come into effect.

What comes under MDR? Who bears the cost?

• All UPI transactions above Rs 2,000 made to a merchant (person-to-merchant or P2M transactions) will attract an MDR of 0.4%. This cost has to be borne by the merchant.

• The government says around 96% of merchant transactions are below the value of Rs 2,000, and they will not attract MDR. This means only 4% of transactions will come under the MDR ambit.

What/who will not be affected?

• Person-to-person (P2P) transactions will not attract MDR. So, individuals can make direct personal transfers free of charge.

• As of now, individuals can do 20 UPI transactions a day of up to Rs 1 lakh. The value may be higher in the case of payments made to hospitals, educational institutions, and stock markets.

• MDR is also not applicable on payments made to merchants up to Rs 2,000, and small merchants who receive up to Rs 1 lakh per month via UPI.

• Credit card-linked UPI payments will also not fall under the 0.4% MDR regime.

Other charges

• For transactions of Rs 75,000 and above, MDR has been capped at Rs 300 per transaction.

• Transactions above Rs 2,000 in essential and thin-margin sectors, including railways, telecommunications, insurance, fuel and agricultural inputs, will attract a flat MDR of Rs 5 per transaction. The government has said the flat charge will provide cost certainty for critical public services and businesses operating on narrow margins.

• Payments relating to mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02%, capped at Rs 300 per transaction. The government has said the lower rate is intended to support continued retail participation in formal financial markets.

Why MDR?

The government has said MDR on certain merchant transactions is being introduced to make the UPI system robust. The revenue is expected to boost infrastructure resiliency, innovation, cybersecurity, and customer service.

The MDR collected will be distributed among payment ecosystem participants, including banks and payment application providers, to support the operation and continued expansion of the UPI ecosystem.

Other clarifications

The government has made it clear that customers will not be charged for making UPI payments. MDR is a charge within the merchant payment ecosystem.

Banks have been advised to ensure that merchants do not pass on the MDR charge to customers. UPI application providers are also expressly prohibited from imposing platform fees or hidden charges.

10 years of UPI

Unified Payment Interface (UPI) was launched on April 11, 2016 as a digital payment mechanism with transactions conducted primarily through a smartphone.

The National Payments Council of India (NPCI) manages and operates UPI. This umbrella organisation operates retail payment and settlement systems across India. It was established in 2008 by the Reserve Bank of India and the Indian Banks Association. This consortium was later expanded to include other digital payment operators.

UPI transactions expanded from 2 crore in FY2016-17 to over 24,162 crore in FY2025-26. 

The value of UPI transactions rose from Rs 0.07 lakh crore in FY2016-17 to around Rs 314 lakh crore in FY 2025-26.