What You Need to Know About the New UPI Merchant Charges Coming This October

Government Introduces Merchant Charges for UPI Transactions

In a significant policy shift, the Indian government is set to impose a fee on merchants utilizing its prominent digital payment system, the Unified Payments Interface (UPI), for larger transactions. This decision comes after persistent concerns from the payment sector regarding the inadequacy of the annual subsidy allocated for UPI, which has failed to cover the actual operational costs.

Starting October 15, a Merchant Discount Rate (MDR) of 0.4% will be applied to UPI payments exceeding Rs 2,000. This fee will be the responsibility of merchants rather than consumers, with a cap of Rs 300 for transactions of Rs 75,000 or more. Most everyday merchant transactions and person-to-person payments will continue to be free of charge.

The National Payments Corporation of India (NPCI), which manages the UPI network, stated that the revenue generated from this fee will be directed towards enhancing infrastructure resilience, cybersecurity, fraud prevention, innovation, and customer service.

The introduction of the MDR marks the end of a zero-MDR policy that has been in effect since January 2020, when the government eliminated merchant fees on UPI and RuPay debit card transactions to promote digital payment adoption, compensating banks and fintech companies through an annual incentive scheme.

Since then, UPI has expanded significantly, processing 2,451 crore transactions valued at Rs 29.9 lakh crore in August 2026. However, the costs associated with maintaining a reliable and secure system have also increased.

According to NPCI, industry estimates suggest that the annual operational cost of UPI, which includes servers, bandwidth, fraud prevention, and technical support, is approximately Rs 20,000 crore. The Department of Financial Services informed a parliamentary committee that the payments industry spends around Rs 20,700 crore each year on person-to-merchant transactions alone.

A parliamentary committee report released in March highlighted that the lack of an MDR was making UPI financially unsustainable.

In contrast, the government's actual subsidy to compensate banks for providing UPI and RuPay payments without merchant fees has been significantly lower than the estimated costs. The highest budget allocation was Rs 3,631 crore for FY2023-24, while the Budget Estimate for FY2025-26 was only Rs 437 crore, although the final payout was increased to approximately Rs 2,196 crore.

The allocation for FY2026-27 stands at Rs 2,000 crore.

This disparity between the operational costs of an expanding payment network and the government's funding capabilities has driven the payments industry to advocate for a regulated MDR.

Even during its peak, the subsidy covered only about 10% of the costs that the industry claims are necessary to maintain the network. NPCI, in its FAQ regarding the new framework, referred to the annual incentive as "short-term bridge funding rather than a permanent solution," emphasizing that reliance solely on budget allocations creates funding uncertainty and restricts long-term technological investments by banks and fintechs.

The Payments Council of India has long sought the authority to impose a controlled MDR on larger merchants instead of relying on government subsidies.

The 0.4% MDR will apply to UPI payments exceeding Rs 2,000 made to merchants.

For instance, a payment of Rs 5,000 would incur an MDR of Rs 20, while a payment of Rs 50,000 would result in Rs 200. At Rs 75,000, the MDR calculation reaches Rs 300, after which the fee is capped.

Essential services such as railways, telecom, fuel, and insurance will incur a flat fee of Rs 5 per transaction for amounts above Rs 2,000.

Transactions in capital markets (mutual funds, stockbroking) will have a reduced rate of 0.02%, also capped at Rs 300.

Small merchants earning up to Rs 1 lakh monthly through UPI QR codes will remain exempt from any new charges, a provision that officials claim protects about 96% of all merchant transactions.

UPI QR payments to merchants in rural and semi-urban regions will also continue to be free. Additionally, 5% of MDR collections will be allocated to a dedicated fund aimed at increasing UPI acceptance among small merchants.

As for consumers, they will not bear the cost directly.

NPCI has clarified that the MDR cannot be passed on to consumers. The government has also mandated that UPI app providers cannot impose platform fees or hidden charges, and banks are instructed to ensure that merchants do not transfer the MDR costs to customers.

However, the economic impact on consumers will depend on how merchants react to the new costs. A merchant who absorbs the MDR will experience a slight margin reduction, while one who adjusts prices or alters payment incentives may indirectly shift some costs to consumers.

The Rs 2,000 threshold is designed to maintain the zero-MDR model for most small-value transactions while monetizing higher-value merchant payments.

It also aligns with the original policy objective of keeping digital payments affordable for small merchants and consumers.

The government continues to fund incentives for low-value UPI payments, with the FY2026-27 Budget allocating Rs 2,000 crore for incentives covering low-value BHIM-UPI and RuPay debit card transactions.

In FY2025-26, UPI processed 24,161.69 crore transactions worth approximately Rs 314 lakh crore, according to Ministry of Finance data, a significant increase from 1.78 crore transactions valued at Rs 0.07 lakh crore in FY2016-17, the year UPI was launched. The number of banks participating in the platform grew from 44 to 703 during this period.

The ministry's data reveals two distinct transaction patterns: person-to-merchant (P2M) transactions account for 63% of total transaction volume but a smaller share of value, with around 86% of P2M transactions being below Rs 500, representing small, everyday payments like bus fares and purchases from tea stalls and vegetable vendors.

Conversely, person-to-person (P2P) transactions constitute 37% of volume but 71% of total transaction value, including rent, salaries, remittances, and larger transfers between individuals, with about 59% of P2P transactions also falling below Rs 500.

The new fee is specifically targeted: government data indicates that only about 4% of P2M transactions exceeded the Rs 2,000 threshold in FY2025-26, yet this small segment accounted for nearly two-thirds of total UPI payment value, which is why officials characterize the new MDR as affecting high-value merchant transactions while leaving the vast majority of daily UPI usage unaffected.

UPI, developed by NPCI under the supervision of the Reserve Bank of India, was launched in August 2016. In January 2020, Parliament amended the Payment and Settlement Systems Act, 2007, and the Income-tax Act, 1961, to eliminate the MDR on RuPay debit cards and UPI transactions, a move credited with accelerating adoption but one that shifted the entire cost of maintaining the network onto banks, apps, and the government.

Today, UPI represents a significant portion of India's digital payments and is utilized in several other countries, including the UAE, Singapore, Sri Lanka, Nepal, Bhutan, Mauritius, Qatar, and France.

The revised MDR framework follows the enactment of the Taxation and Other Laws (Amendment) Bill, 2026, and comes after extensive industry lobbying and a parliamentary committee's warning regarding UPI's financial sustainability.

The new MDR is less about charging UPI users and more about changing who bears the cost of maintaining India's most widely used digital payments network.

The previous model kept merchant payments free while compensating banks through budgetary incentives. With UPI now processing billions of transactions monthly, the policy introduces a dual approach: keeping payments free for individuals and smaller merchants while allowing the ecosystem to monetize larger commercial transactions directly.

For the approximately 55 crore Indians using UPI and the vast majority of small merchants, nothing changes—payments remain free.

For larger merchants handling high-value transactions, and for the payment companies and banks that have absorbed UPI's costs for six years, October 15 signifies a transition from a subsidy-dependent model to one where high-value transactions contribute to the network's maintenance, even though the government's Rs 2,000 crore allocation for FY2026-27 falls short of the Rs 20,000 crore that the industry claims is necessary for UPI's long-term viability.