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UPI MDR (Merchant Discount Rate) is a fee charged to a merchant for processing an eligible payment—not a tax or a fee charged to the customer. Under India’s framework announced on 15 September 2026, the published MDR provisions are scheduled to take effect on 15 October 2026. They distinguish person-to-person transfers from merchant payments, exempt payments up to ₹2,000, preserve zero MDR for eligible small P2PM merchants, and set separate rates for specified larger merchant transactions.
What UPI MDR means for a business
MDR is the merchant-side processing fee associated with accepting a payment. It is part of the payment ecosystem’s cost of handling a transaction; it is not money collected as a tax by the Government or NPCI. The Ministry of Finance described it as distributed among ecosystem participants in its 15 September 2026 announcement.
Under the published framework, consumers are not to be charged MDR, banks have been advised to prevent merchants from passing it on, and UPI application providers are prohibited from imposing platform fees or hidden charges. That policy does not establish that every service connected with accepting payments is free: the official announcement and FAQ do not set out every merchant’s acquiring contract or ancillary terms.
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The rules distinguish the people and accounts involved. A P2P transaction is a person-to-person transfer. A P2M transaction is a payment from a user to a merchant. The Department of Financial Services says the MDR amendment applies to direct user-account-to-merchant-account UPI transactions; credit-linked UPI payments follow separate credit-product rules, according to its FAQ dated 15 September 2026.
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Published MDR treatment by transaction type
| Transaction or merchant category | Published treatment |
|---|---|
| P2P transfer | Free at any amount, according to the Ministry of Finance. |
| P2M payment up to ₹2,000 | Free of MDR. |
| Eligible P2PM small merchant | Zero MDR on all transactions if the merchant receives up to ₹1 lakh per month through UPI QR in the P2PM category. |
| Specified P2M transaction above ₹2,000 | 0.4% MDR, capped at ₹300 for transactions of ₹75,000 and above. |
| Named essential and thin-margin sectors: railways, telecommunications, insurance, fuel, and agricultural inputs | Flat ₹5 MDR for transactions above ₹2,000. |
| Capital-market categories: mutual funds, securities, stockbrokers, and dealers | 0.02% MDR, capped at ₹300. |
The rates and categories above are those in the Ministry of Finance release. They do not mean that every payment above ₹2,000 automatically incurs the standard rate: the published framework specifies transaction categories, and the P2PM small-merchant exemption applies across an eligible merchant’s transactions.
How the standard rate and cap work
The Department of Financial Services FAQ illustrates the published 0.4% standard rate with these calculations. They show the MDR amount, not a quote for a particular merchant’s complete payment-acceptance cost.
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| Example transaction | Calculation under the FAQ | Illustrated MDR |
|---|---|---|
| ₹3,000 | 0.4% of ₹3,000 | ₹12 |
| ₹50,000 | 0.4% of ₹50,000 | ₹200 |
| ₹1,00,000 | 0.4% would be ₹400, but the stated cap applies | ₹300 |
| More than ₹2,000 in one of the named flat-rate sectors | Flat fee under the published category rule | ₹5 |
For the standard rate, 0.4% of the transaction amount reaches the ₹300 cap at ₹75,000. The release states the cap for transactions of ₹75,000 and above.
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The Department of Financial Services FAQ gives 15 October 2026 as the effective date for the updated provisions. As of 7 October 2026, that date was still in the future. The September announcement therefore describes the framework scheduled to begin on that date, rather than a rate already in effect at the time of the announcement.
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What the estimates say about how many payments are affected
The Ministry of Finance release estimates that approximately 96% of all P2M transactions will remain unaffected, saying MDR will apply to about 4% of merchant transactions. Separately, the Department of Financial Services FAQ says more than 95% of P2M transaction volume is at or below ₹2,000. These are different measures: one is the estimated share of transactions unaffected, and the other is the share of transaction volume at or below the threshold.
How a business should read an MDR quote
A published MDR rate is not necessarily the full cost of accepting payments. When reviewing an acquiring provider’s quote or agreement, identify the factors that determine whether the policy rate applies and whether other contract terms add costs.
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- Transaction type: establish whether a payment is P2P or P2M and whether it is a direct user-account-to-merchant-account transaction.
- Merchant classification: check the acquiring classification, including whether the merchant qualifies for P2PM treatment. The FAQ discusses classification and monitoring of the monthly receipt threshold.
- Transaction amount and category: confirm the ₹2,000 threshold and whether the transaction falls into a named sector or capital-market category.
- Rate, cap, and effective date: compare the applicable percentage or flat fee, any cap, and the date the relevant provision takes effect.
- Contract terms: check the merchant’s acquiring agreement for provider-specific or ancillary charges; the government’s MDR announcement does not establish those terms for an individual business.
Earlier UPI incentives are historical, not part of the new rate
The Prime Minister’s Office described a low-value BHIM-UPI P2M incentive scheme for FY 2024–25, running from 1 April 2024 through 31 March 2025. That historical scheme provided a 0.15% incentive for eligible small-merchant transactions up to ₹2,000. The same announcement said zero MDR for RuPay debit-card and BHIM-UPI transactions had been introduced from January 2020. These past arrangements should not be read as an additional incentive under the September 2026 framework. See the Prime Minister’s Office announcement.
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