UPI MDR From October 15: Finance Minister Nirmala Sitharaman Clarifies Who Pays 0.4% Charge On Payments Above ₹2,000

UPI MDR from October 15: Unified Payments Interface (UPI) payments above ₹2,000 to eligible merchants will attract a 0.4% Merchant Discount Rate (MDR), capped at ₹300 per transaction, from October 15, 2026. Finance Minister Nirmala Sitharaman has clarified that the new UPI charge will not be paid directly by customers and is not a tax or cess collected by the government.

The new UPI MDR will apply to person-to-merchant (P2M) transactions above ₹2,000, while UPI payments of ₹2,000 or less will continue to carry zero MDR. Person-to-person (P2P) UPI transfers between individuals will also remain free, irrespective of the amount transferred. For transactions of ₹75,000 and above, the standard 0.4% MDR will be capped at ₹300.

The clarification is important for UPI users because the introduction of MDR has raised questions over whether customers making high-value payments will have to pay more. Under the new framework, the charge will be settled within the merchant-side payment ecosystem, with banks, payment service providers and UPI application providers sharing the MDR. The government has said customers will not be charged the MDR separately.

UPI MDR above ₹2,000: How much will merchants pay?

For eligible P2M transactions above ₹2,000, the standard MDR will be 0.4% of the transaction value. The charge is applied to the merchant-side payment transaction rather than added to the amount paid by the customer.

For example, a merchant receiving a ₹3,000 UPI payment would incur an MDR of ₹12. On a ₹10,000 transaction, the MDR would be ₹40, while a ₹50,000 payment would attract ₹200.

The cap becomes relevant for larger transactions. A ₹1 lakh UPI payment would result in a calculated MDR of ₹400 at 0.4%, but the applicable charge would be restricted to ₹300 because the cap applies to transactions of ₹75,000 and above.

The ₹2,000 threshold is a per-transaction threshold, rather than a daily limit. Therefore, multiple UPI payments of ₹2,000 or less can continue to be made without MDR.

UPI charges from October 15: Customers will not pay MDR

Finance Minister Nirmala Sitharaman has said the MDR is not a tax or cess. The amount collected through the framework will remain within the payment ecosystem rather than going to the government as tax revenue.

This means a customer paying ₹10,000 to an eligible merchant through UPI will still initiate a ₹10,000 payment. The 0.4% MDR is a cost on the merchant-side payment arrangement and is not supposed to be added separately to the customer's bill.

The government has also indicated that the framework is intended to provide a sustainable funding mechanism for the UPI ecosystem, with the MDR being distributed among participating banks, payment service providers and UPI application providers.

The National Payments Corporation of India (NPCI) has said UPI will continue to remain free for P2P payments, while the majority of everyday UPI transactions will remain outside the MDR framework.

UPI MDR for small merchants: Who is exempt?

Not every merchant receiving a UPI payment above ₹2,000 will automatically have to pay the 0.4% MDR.

Small merchants classified under the person-to-person-to-merchant (P2PM) category remain outside the MDR framework. According to NPCI's framework, merchants receiving up to ₹1 lakh a month through UPI continue to qualify for zero MDR. A merchant moves into the P2M category if its UPI receipts exceed ₹1 lakh for three consecutive months, subject to classification by the acquiring bank or payment service provider.

This distinction is important for small shops and vendors. A small merchant can therefore receive a UPI payment above ₹2,000 without automatically becoming liable for the 0.4% MDR.

The government has said the framework is designed to protect small merchants while introducing charges for higher-value commercial transactions.

UPI MDR in fuel, insurance and railways: ₹5 charge

Certain essential and thin-margin sectors will have a separate MDR structure. UPI payments above ₹2,000 involving categories such as railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat ₹5 MDR per transaction instead of the standard 0.4% rate.

For example, an eligible ₹10,000 payment in one of these categories would attract ₹5 rather than the ₹40 that would apply under the standard 0.4% rate.

The flat fee is intended to provide greater certainty for businesses operating in sectors where margins can be relatively narrow. The exact treatment depends on the merchant category under the NPCI framework.

UPI MDR for mutual funds and stock market payments

Capital market-related UPI transactions will have another separate rate. Payments involving mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02%, subject to a maximum of ₹300 per transaction.

The rate is substantially lower than the standard 0.4% MDR for eligible merchant transactions. The framework covers payments connected with capital-market transactions and is separate from ordinary retail purchases.

For investors, this means the new UPI MDR structure does not impose the standard 0.4% rate on every UPI payment made to a mutual fund or market intermediary.

UPI MDR and GST: What merchants need to know

GST will also apply to the MDR charged to merchants under the new framework. Tax experts have said the applicable GST on the payment processing service can be claimed as input tax credit by eligible registered businesses, subject to the normal GST rules.

Therefore, the MDR and GST on that MDR are separate from the customer's UPI payment. The treatment of the GST will depend on the merchant's registration and eligibility to claim input tax credit.

UPI new rules 2026: What changes from October 15?

The new framework creates a threshold-based MDR system rather than introducing a charge on all UPI transactions.

From October 15, P2M payments of up to ₹2,000 will remain free of MDR, while eligible transactions above ₹2,000 will attract 0.4%, capped at ₹300 for payments of ₹75,000 and above. P2P transactions will continue to be free, and small merchants covered under the P2PM category will remain exempt.

For customers, the key point is that the MDR is not meant to be an additional UPI charge at the time of payment. For merchants and payment companies, however, the October 15 change introduces a new cost and revenue-sharing structure for eligible higher-value transactions.

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