UPI MDR Explained: Who Pays, Who's Exempt, What Changes Oct 15

UPI MDR Explained: Who Pays, Who's Exempt, What Changes Oct 15

Merchant Discount Rate, or MDR, is not a new concept in digital payments, but its return to UPI has generated a lot of questions. From October 15, 2026, a new MDR framework will apply to specified person-to-merchant (P2M) UPI transactions. Here's a clear breakdown of who pays it, who remains exempt, and exactly what changes from October 15.

What Is MDR?

MDR stands for Merchant Discount Rate. It is a charge applicable within the payment ecosystem when a merchant accepts an eligible digital payment.

Under the new UPI framework, the MDR is a merchant-side cost. It is distributed among relevant participants in the payment ecosystem, including banks, payment service providers and UPI application providers.

The important point for customers is that MDR is not a fee charged to individuals for using UPI.

Who Actually Pays the New UPI MDR?

The merchant accepting the payment bears the MDR, not the customer.

For specified person-to-merchant UPI transactions above ₹2,000, the standard MDR is 0.4% of the transaction value. The amount is deducted from the merchant's settlement rather than being added separately to the customer's payment.

For example, if an eligible merchant receives a ₹10,000 UPI payment under the standard MDR category, the applicable MDR would be ₹40.

The customer still pays the merchant's displayed price and does not pay the ₹40 MDR separately.

Who Is Exempt From the New Charge?

• All person-to-person (P2P) UPI transfers, regardless of value
• Eligible person-to-merchant (P2M) payments of ₹2,000 or below
• Eligible small merchants receiving up to ₹1 lakh per month through UPI QR codes under the Person-to-Person-Merchant (P2PM) category

These provisions keep a large portion of everyday UPI activity outside the MDR framework.

For eligible small merchants under the P2PM framework, zero MDR continues to apply to their eligible transactions within the applicable monthly limit. This protection is particularly relevant for street vendors, neighbourhood shops and other small businesses accepting UPI payments.

What Exactly Changes From October 15?

Transaction Type	MDR Before Oct 15	MDR From Oct 15
P2P transfer (any amount)	Zero	Zero
P2M payment up to ₹2,000	Zero	Zero
P2M payment above ₹2,000 (standard)	Zero	0.4%, capped at ₹300
Fuel, telecom, insurance, railways and specified essential sectors	Zero	₹5 flat MDR per transaction above ₹2,000
Capital markets / stockbroker payments	Zero	0.02%, capped at ₹300

The exact MDR therefore depends on the transaction category. The standard 0.4% rate does not apply identically to every type of merchant transaction.

How the ₹300 Cap Works

The standard 0.4% MDR applies proportionally until the transaction reaches ₹75,000.

At ₹75,000, 0.4% equals ₹300. Once the transaction value reaches ₹75,000 or more, the MDR for the standard category is capped at ₹300 per transaction.

For example:

• ₹5,000 payment → ₹20 MDR
• ₹10,000 payment → ₹40 MDR
• ₹50,000 payment → ₹200 MDR
• ₹75,000 payment → ₹300 MDR
• ₹1,00,000 payment → ₹300 MDR

Therefore, a ₹1 lakh UPI payment under the standard MDR category does not attract ₹400 MDR. The applicable amount remains capped at ₹300.

Can the Cost Be Passed to Customers?

No. MDR is structured as a merchant-side charge and is not intended to be added separately to the customer's UPI payment.

Banks have been advised to ensure that merchants do not pass MDR charges directly on to customers. UPI application providers are also prohibited from imposing platform fees or hidden charges on consumers under the framework.

This means a merchant should not add a separate line such as ""UPI MDR"", ""UPI fee"" or ""UPI surcharge"" to a customer's bill simply because the customer chooses to pay through UPI.

However, merchants may independently review their overall business costs and pricing. Any broader change in the price of a product or service should not be described as a direct UPI MDR surcharge.

Why Is This Happening Now?

The Government has said that the new framework is intended to support the long-term sustainability of the UPI ecosystem while protecting individuals and small merchants from additional charges.

UPI requires continued investment in areas such as payment infrastructure, cybersecurity, fraud prevention and technological development. The MDR framework introduces a charge on specified higher-value merchant transactions while keeping P2P payments and a large share of everyday merchant payments outside the MDR structure.

The framework therefore separates ordinary consumer usage from specified higher-value commercial transactions.

What Does This Mean for Everyday UPI Users?

For most everyday users, there is no new customer-side UPI fee.

If you send money to another person, the transaction remains free. If you make an eligible merchant payment of ₹2,000 or below, it also remains free of MDR.

If you make a larger purchase from a merchant, the applicable MDR is a merchant-side payment-processing cost. It should not appear as a separate MDR charge on your bill.

According to the Government, approximately 96% of P2M transactions will remain unaffected because they are either at or below ₹2,000 or are covered by the applicable zero-MDR framework for eligible small merchants.

Frequently Asked Questions

Does MDR apply to me as an individual customer?
No. MDR applies to specified merchant-side transactions. Customers are not required to pay MDR for making UPI payments.

Is there any UPI transaction that remains free?
Yes. All P2P UPI transfers remain free, irrespective of the amount transferred. Eligible P2M payments of ₹2,000 or below also remain free of MDR.

What happens to a transaction above ₹75,000?
For the standard 0.4% MDR category, the charge is capped at ₹300 per transaction once the transaction value reaches ₹75,000.

Do small shopkeepers need to pay the new MDR?
Eligible small merchants receiving up to ₹1 lakh per month through UPI QR codes under the P2PM category continue to receive zero MDR on eligible transactions.

Can a small merchant receive a payment above ₹2,000 without MDR?
An eligible small merchant covered by the P2PM zero-MDR framework can continue to receive eligible UPI payments without MDR within the applicable monthly threshold, even when an individual payment exceeds ₹2,000.

Will this show up as a separate charge on my UPI payment?
No. MDR is deducted on the merchant side and is not intended to be added as a separate customer-side UPI charge.

Do all merchant payments above ₹2,000 attract 0.4% MDR?
No. The standard rate is 0.4% for specified P2M transactions. Certain essential and thin-margin sectors have a flat ₹5 MDR for transactions above ₹2,000, while specified capital-market transactions have a 0.02% MDR capped at ₹300.

Is MDR a government tax?
No. MDR is not a tax or a charge collected by the Government or NPCI. It is a charge within the payment ecosystem and is distributed among relevant ecosystem participants.

Does the MDR apply to P2P transfers?
No. Person-to-person UPI transfers remain completely free regardless of the amount transferred.

How is MDR different from a bank transfer fee?
MDR is a merchant-side payment-processing charge applicable to specified merchant transactions. It is different from a fee that a bank may separately apply to another type of banking service or transfer.

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