💳 UPI Update: MDR on Select Merchant Transactions Above ₹2,000
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Unified Payments Interface (UPI) has transformed the way individuals and businesses make payments in India. From small retail purchases to large business transactions, UPI has become an important part of the country’s digital payment ecosystem.
A significant new development has now been announced for select UPI merchant transactions above ₹2,000. Under the revised framework, a Merchant Discount Rate (MDR) of 0.4% will apply to specified Person-to-Merchant (P2M) UPI transactions above ₹2,000, with the new framework coming into effect from 15 October 2026.
Importantly, this does not mean that customers will suddenly have to pay a UPI transaction fee. Person-to-Person (P2P) UPI transactions will remain free, while merchant payments up to ₹2,000 will also remain outside the standard MDR framework.
For businesses, however, understanding the new rules is important because the cost structure associated with accepting certain higher-value UPI payments may change.
What Is MDR?
MDR stands for Merchant Discount Rate. It is a charge associated with accepting digital payments and is generally borne within the merchant payment ecosystem.
Under the new UPI framework, MDR is applicable to specified merchant transactions rather than ordinary person-to-person transfers.
For example, if an eligible merchant receives a UPI payment of ₹3,000 under the standard 0.4% MDR category, the MDR would be ₹12.
Similarly:
- ₹5,000 transaction → 0.4% MDR = ₹20
- ₹10,000 transaction → 0.4% MDR = ₹40
- ₹50,000 transaction → 0.4% MDR = ₹200
For transactions of ₹75,000 or more, the standard MDR is capped at ₹300 per transaction.
Therefore, businesses accepting larger UPI payments should understand how the revised framework applies to their merchant category and payment arrangement.
P2P UPI Transactions Continue to Remain Free
One of the most important points is that the new framework does not impose MDR on Person-to-Person transactions.
If one individual transfers money to another individual through UPI, the transaction remains free irrespective of the amount involved.
For example:
- Friend-to-friend transfer
- Family member-to-family member transfer
- Personal transfer between individuals
- Other eligible P2P transactions
These continue to remain outside the MDR framework.
The Government has also clarified that customers will not be charged an MDR for making UPI payments. Banks have been advised that merchants should not pass the MDR cost on to customers.
What Happens to Merchant Payments Up to ₹2,000?
Merchant payments up to ₹2,000 will continue to remain free of MDR under the framework.
This is particularly relevant for everyday transactions such as:
- Grocery purchases
- Small restaurant bills
- Local retail purchases
- Small service payments
- Neighbourhood shops
- Other low-value merchant transactions
According to the Government, approximately 96% of P2M transactions are expected to remain unaffected, because they are either within the ₹2,000 threshold or covered by zero-MDR provisions for eligible small merchants.
This means the revised framework is primarily relevant to specified higher-value merchant transactions rather than ordinary low-value UPI payments.
Impact on Small Merchants
The framework also provides protection for certain small merchants.
Small merchants, including eligible street vendors and neighbourhood businesses receiving up to ₹1 lakh per month through UPI QR codes under the applicable P2PM category, can continue to receive payments under a zero-MDR framework.
This is significant because many micro-businesses depend heavily on UPI for daily collections.
A small retailer receiving numerous low-value UPI payments may therefore continue to operate without the standard MDR applying to those eligible transactions.
However, merchants should not assume that every business automatically qualifies for a zero-MDR category. Applicability depends on the merchant's classification and the applicable payment framework.
Which Transactions Attract the 0.4% MDR?
The standard rate is 0.4% for specified Person-to-Merchant transactions above ₹2,000.
The framework is therefore important for businesses that regularly receive higher-value UPI payments.
Examples could include businesses receiving payments for:
- Higher-value retail purchases
- Professional services
- Business services
- Premium products
- Large invoices
- Other eligible merchant transactions
The exact treatment depends on the merchant category, transaction type and applicable rules.
Businesses should therefore coordinate with their acquiring bank, payment aggregator or UPI service provider rather than relying only on the transaction amount.
Special Treatment for Essential Sectors
The framework provides a different treatment for certain essential and thin-margin sectors.
Transactions above ₹2,000 in specified categories such as:
- Railways
- Telecommunications
- Insurance
- Fuel
- Agricultural inputs
will attract a flat MDR of ₹5 per transaction, rather than the standard 0.4% structure.
This category-specific approach is intended to provide greater cost certainty for sectors where margins may be relatively narrow or where digital payments are particularly important.
Businesses operating in these sectors should therefore verify their merchant classification and ensure that their payment systems are configured correctly.
Capital Market Transactions
The framework also provides a separate MDR structure for specified capital-market transactions.
Payments relating to areas such as:
- Mutual funds
- Securities
- Stockbrokers
- Dealers
will attract an MDR of 0.02%, subject to a maximum of ₹300 per transaction.
This is different from the standard 0.4% MDR applicable to specified P2M transactions above ₹2,000.
Therefore, businesses and financial-market participants should pay attention to transaction classification rather than applying a single MDR rate to every UPI payment.
What Does This Mean for Customers?
For ordinary UPI users, the practical impact is limited.
Customers can continue to use UPI for Person-to-Person payments without a transaction charge.
Merchant payments up to ₹2,000 also remain free under the applicable framework.
Most importantly, the MDR is structured as a merchant-side payment ecosystem charge. Customers are not supposed to be separately charged MDR by merchants for making eligible UPI payments.
Therefore, if a customer pays ₹10,000 to an eligible merchant through UPI, the existence of the 0.4% MDR does not mean that the customer should add another ₹40 to the bill merely because the payment is made through UPI.
Businesses should ensure that their billing practices remain consistent with the applicable rules.
What Should Businesses Do?
Businesses that accept UPI payments should take the opportunity to review their payment arrangements before the new framework becomes effective.
1. Check Your Merchant Category
Confirm how your business is classified by your acquiring bank, payment aggregator or UPI service provider.
Merchant classification can affect the applicable MDR framework.
2. Review Payment Agreements
Check agreements with banks, payment aggregators and other payment service providers to understand how MDR will be calculated and settled.
3. Update Accounting Systems
Businesses should ensure that accounting and reconciliation systems can separately identify:
- Gross UPI collections
- MDR
- Other applicable payment charges
- Net settlement
- Refunds
- Chargebacks
Proper accounting will help businesses reconcile bank statements with sales records.
4. Review Pricing and Billing Policies
Businesses should not automatically add MDR as a separate customer charge.
Instead, businesses should understand the applicable framework and ensure that invoices, receipts and customer-facing payment instructions are compliant.
5. Monitor Settlement Reports
After implementation, merchants should regularly compare UPI transaction reports with bank settlements.
Any unexpected deduction should be reviewed with the acquiring bank or payment service provider.
Why This Update Matters for Businesses
UPI has become a major payment channel for Indian businesses. NPCI data shows the scale of this ecosystem: in August 2026, UPI recorded about 24.51 billion transactions with a value of approximately ₹29.82 lakh crore.
With such a large payment ecosystem, even a small change in transaction charges can have accounting and operational implications for businesses processing significant volumes of payments.
For a business accepting thousands of higher-value UPI transactions, monitoring MDR deductions can therefore become an important part of financial reconciliation.
UPI Remains a Major Digital Payment Platform
The introduction of MDR on specified transactions should be understood as a change in the payment ecosystem's cost structure rather than the end of free UPI payments.
The framework continues to protect:
- Person-to-person payments
- Merchant payments up to ₹2,000
- Eligible small merchants covered by zero-MDR provisions
- Certain essential-sector transactions through a flat-rate mechanism
At the same time, specified higher-value merchant transactions will contribute to the payment ecosystem through MDR.
The Government has stated that MDR is not a tax collected by the Government or NPCI. It is distributed among participants in the payment ecosystem, including banks and payment application providers, to support the operation and expansion of UPI.
Key Takeaways
The major points businesses and UPI users should remember are:
✅ P2P UPI transactions remain free.
✅ Merchant payments up to ₹2,000 remain free of MDR.
✅ Specified P2M transactions above ₹2,000 will attract 0.4% MDR.
✅ For transactions of ₹75,000 and above, the standard MDR is capped at ₹300.
✅ Eligible small merchants can continue under zero-MDR provisions.
✅ Certain essential sectors have a flat ₹5 MDR for eligible transactions above ₹2,000.
✅ Specified capital-market transactions have a separate 0.02% MDR, capped at ₹300.
✅ The revised framework takes effect from 15 October 2026.
✅ Customers are not supposed to bear the MDR as a separate UPI payment charge.
Conclusion
The revised UPI MDR framework represents an important development for India's digital payment ecosystem.
For consumers, everyday UPI usage remains largely unchanged because P2P transactions remain free and merchant payments up to ₹2,000 continue without MDR. For businesses, particularly those handling higher-value digital collections, the change makes it important to understand merchant classification, applicable rates, settlement deductions and accounting treatment.
As the implementation date of 15 October 2026 approaches, businesses should review their payment arrangements and discuss the applicable MDR treatment with their banks or payment service providers.
Staying informed about changes in digital payments, taxation, accounting and compliance can help businesses plan their financial operations more effectively.
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