For millions of Indians, paying by scanning a QR code has become part of everyday life. UPI processed 24.51 billion transactions in August 2026 alone, according to NPCI.
Now, the way some UPI merchant payments are processed is set to change.
From 15 October 2026, a 0.4% Merchant Discount Rate (MDR) will apply to specified person-to-merchant UPI transactions above Rs. 2,000.
What does the new rule cover, who will pay the charge, and what does it mean for customers? Here’s what you need to know.
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Is UPI Becoming A Paid Service?
The biggest point to clear up is that you will not suddenly be charged for sending money to your friends or family.
All person-to-person UPI payments will remain free, regardless of the amount. So if you send Rs. 5,000 to a friend, there is no MDR on that transaction.
UPI payments to merchants up to Rs. 2,000 will also remain free.
The government says around 96% of merchant transactions will remain unaffected, either because they are below the Rs. 2,000 threshold or because they fall under the zero-MDR framework for small merchants.
What Gets Charged?
For specified person-to-merchant transactions above Rs. 2,000, the standard MDR will be 0.4%, capped at Rs. 300 for transactions of Rs. 75,000 and above.
For some sectors, a flat Rs. 5 MDR will apply instead. These include categories such as railways, telecom services, insurance, fuel and agricultural inputs. Certain utility payments also fall under the concessional structure.
Capital-market payments have a separate rate of 0.02%, capped at Rs. 300.
Recurring UPI AutoPay transactions, including subscriptions and other standing mandates, are outside the current MDR framework.
There is another important protection for small businesses. Merchants classified under the P2PM category, including small shopkeepers and street vendors receiving up to Rs. 1 lakh a month through UPI, will continue to receive zero MDR.
What Is MDR?
MDR stands for Merchant Discount Rate. It is a fee that a merchant may pay for accepting a digital payment. It is usually charged as a small percentage of the payment amount.
For example, if the MDR is 0.4% and a customer pays a shop Rs. 10,000, the MDR would be Rs. 40. So, in simple terms, MDR is the charge linked to processing a digital payment for a merchant.
Why Is The Government Bringing It Back?
UPI payments have had zero MDR since January 2020, when the government removed the charge to encourage digital payments.
The government now says UPI needs a more sustainable financial model as transaction volumes rise and the system requires continuous investment in infrastructure, cybersecurity and fraud prevention.
It has also argued that relying only on subsidies is not sustainable for the next stage of UPI's expansion. The new framework is intended to create revenue for participants across the payment ecosystem, including banks and payment service providers.
The government has also stressed that MDR is not a tax collected by the government or NPCI. It is a payment-system charge distributed among ecosystem participants.
But What If Merchants Raise Prices?
The proposed MDR has drawn criticism from entrepreneur Ashneer Grover and Congress leaders.
Grover questioned the government’s position that customers would not be directly affected. In a post reacting to the proposed merchant charge, he wrote: “End of the day consumer pays.” He also said, “Call it tax, not charge.”
Rahul Gandhi said the government had “quietly opened the door to imposing fees on UPI.” He also questioned where charges imposed on shopkeepers would ultimately come from, writing: “Added to prices, straight out of the customer’s pocket.” These were his criticisms of the policy and his view of its possible impact on consumers.
Mallikarjun Kharge criticised the move as well. He said the government’s “loot” had reached UPI and referred to the proposed levy as a “Digital Payments Tax” in his criticism of the policy.
Jairam Ramesh questioned the 0.4% MDR, asking: “Is this being done to enable US card companies to compete with UPI?” He also alleged that the government had “given into a US demand to get rid of zero MDR and charge for UPI.”
Ramesh ended his criticism by saying: “The PM has redefined NOTA - Narendra's Ongoing Trump Appeasement.” These were his political criticisms of the policy.
The government’s stated position is that the MDR is a merchant-side charge and that customers will continue to use UPI without a direct transaction fee. Banks have also been advised to ensure that merchants do not pass the MDR on to customers.
So, Who Actually Needs To Worry?
For someone using UPI to split a dinner bill, send rent to a friend or transfer money to family, nothing changes.
For someone paying a merchant, payments up to Rs. 2,000 remain free of MDR. Larger merchant transactions in specified categories will carry the new merchant-side charge.
The stated financial impact therefore falls on eligible merchants and payment-system participants rather than directly on UPI users.
From 15 October, the key change will be that eligible merchants will bear the MDR, while customers will continue to use UPI without an MDR or platform fee. Banks have been advised to ensure that merchants do not pass the MDR on to customers.
TL;DR | News At A Glance
What is MDR?
MDR stands for Merchant Discount Rate. It is a fee linked to processing a digital payment made to a merchant, usually calculated as a percentage of the transaction amount.
What is changing?
From 15 October 2026, a 0.4% MDR will apply to specified UPI person-to-merchant payments above Rs. 2,000.
Will sending money to friends or family cost more?
No. The government says person-to-person UPI transactions will remain free, irrespective of the amount.
Will customers directly pay the MDR?
No. The government says MDR is a merchant-side charge and customers will not be charged MDR directly.
What happens to payments up to Rs. 2,000?
Person-to-merchant UPI payments up to Rs. 2,000 will remain free of MDR.
What about small shops and street vendors?
Eligible P2PM merchants receiving up to Rs. 1 lakh a month through UPI QR codes will continue with zero MDR.
Why is MDR being introduced?
The government says the framework is intended to support the long-term sustainability and continued expansion of UPI.
Why is there controversy?
Ashneer Grover and opposition leaders have criticised the move, including by arguing that merchants could potentially recover the additional cost through prices. These are their views on the possible consumer impact, while the government has said merchants should not pass the MDR on to customers.
