NPCI's 0.4% UPI MDR: Why Small Merchants and P2P Stay Exempt

Why NPCI Built Exemptions Into the 0.4% UPI MDR

When NPCI announced a 0.4% Merchant Discount Rate on select UPI transactions from October 15, 2026, it paired the charge with a deliberate set of exemptions. Person-to-person transfers and small merchants were carved out from day one. Here's why.

The Policy Goal: Revenue Without Losing Adoption

UPI's growth over the past several years has been built on being free for the person actually making the payment. NPCI's stated aim with the new MDR is to create a sustainable commercial model for the ecosystem's infrastructure, cybersecurity, and fraud prevention — without undoing the affordability that drove UPI's mass adoption in the first place.

Why P2P Transfers Stay Untouched

Person-to-person transfers, such as sending money to family or splitting a bill, were never part of the merchant payment chain that MDR is designed to fund. There is no merchant, no acquiring bank fee to recover, and no commercial transaction to tax. Keeping P2P free also protects UPI's core use case: instant, no-cost money movement between individuals.

Why Small and Micro Merchants Are Protected

Small and micro merchants who receive UPI payments directly into a personal bank account continue to enjoy zero MDR, up to a defined monthly threshold. The logic here is straightforward: these are typically low-margin businesses — street vendors, small kirana stores, and local service providers — for whom even a small percentage fee could meaningfully dent already thin margins or push them back toward cash.

The ₹2,000 Threshold Does Double Duty

Even for merchants who don't qualify for the small-merchant exemption, any payment of ₹2,000 or below stays free of MDR. This threshold protects the bulk of everyday, low-value purchases — a cup of tea, an auto fare, a quick grocery run — regardless of who is accepting the payment.

Who the Charge Is Actually Aimed At

The 0.4% MDR, capped at ₹300 for transactions of ₹75,000 and above, is aimed at larger, established merchants processing higher-value payments where a small percentage fee is a manageable cost of doing business, not an existential one.

What This Balance Achieves

• Preserves free P2P transfers, UPI's most widely used feature
• Shields small vendors and low-value transactions from any new cost
• Creates a funding stream from higher-value merchant transactions
• Keeps the system commercially sustainable as volumes keep growing

Frequently Asked Questions

Why doesn't MDR apply to P2P transfers at all? There's no merchant or commercial transaction involved, so there's nothing for the fee to be levied on.

What counts as a small merchant for exemption purposes? Generally, vendors receiving eligible UPI payments into a personal account, up to a set monthly limit.

Does the ₹2,000 threshold apply to every merchant? Yes, payments of ₹2,000 or below stay MDR-free regardless of merchant size.

Could these exemptions change in the future? NPCI and the government periodically review thresholds as the ecosystem evolves, so it's worth watching official updates.

Is this exemption structure unique to India? Tiered merchant-fee exemptions for small businesses are common internationally, though the specific thresholds and rates vary by market.

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