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Under the Ministry of Finance framework scheduled to take effect on 15 October 2026, certain UPI merchant payments above ₹2,000 are set to carry a merchant discount rate (MDR) paid by the merchant to its acquiring bank—not by the customer. The rate depends on the payment type, amount, merchant classification and business category. As of 13 October 2026, the announced rates are scheduled, not yet in force. The Ministry says merchants may not pass MDR to customers as a separate UPI charge.
What a UPI merchant charge is
MDR, or merchant discount rate, is a payment-acceptance fee associated with certain person-to-merchant (P2M) payments. Under the announced framework, the merchant pays MDR to its acquiring bank—the bank that provides or supports the merchant’s payment acceptance. The acquiring bank then distributes the fee among participants in the payment ecosystem, including banks and payment application providers.
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MDR is not a tax collected by the Government of India or NPCI. The Ministry of Finance put it this way in its 15 September 2026 release: “MDR is neither a tax nor a charge collected by the Government or NPCI.” Ministry of Finance release, 15 September 2026.
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The fee is about the merchant’s cost of accepting a payment. It is not automatically an additional amount the buyer must pay at checkout. The Ministry’s FAQ says merchants cannot pass MDR on to customers, and says UPI application providers are prohibited from charging a platform fee or hidden charge for UPI payments. Department of Financial Services FAQ, 15 September 2026.
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Who pays MDR?
For a transaction to which MDR applies, the merchant bears the charge through its acquiring bank. The Ministry’s example makes the calculation concrete: at the scheduled general rate of 0.4%, a ₹3,000 purchase produces ₹12 MDR, paid by the merchant to its acquiring bank—not added as a customer surcharge.
The applicable treatment is not determined by the payment amount alone. First distinguish a person-to-person (P2P) transfer from a person-to-merchant (P2M) purchase. For P2M, check the value, the merchant’s classification and whether a specified sector rate applies. These categories can change a percentage fee into a flat fee or leave the transaction at zero MDR.
That distinction matters for both merchants and customers. A large P2P transfer remains free under the Ministry’s description, while a P2M payment above ₹2,000 may be subject to a merchant-side rate. Conversely, a qualifying small merchant may retain zero MDR even on a P2M payment above the threshold. “UPI payment” alone is therefore not enough information to determine whether MDR applies.
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The Ministry of Finance FAQ, dated 15 September 2026, describes the following framework as taking effect on 15 October 2026. Since that start date is still forthcoming as of 13 October 2026, these are announced or scheduled treatments rather than rates already in force at the time of writing.
| Payment or merchant case | Scheduled MDR treatment | Who pays |
|---|---|---|
| P2P transfer, regardless of amount | Free; no MDR | No MDR is due |
| P2M payment of ₹2,000 or less | Free of MDR | No MDR is due |
| General P2M payment above ₹2,000 | 0.4%; capped at ₹300 for transactions of ₹75,000 and above | Merchant, through its acquiring bank |
| Specified essential and thin-margin sectors—railways, telecommunications, insurance, fuel and agricultural inputs—above ₹2,000 | Flat ₹5 per transaction | Merchant, through its acquiring bank |
| Specified capital-market payments—mutual funds, securities, stockbrokers and dealers | 0.02%, capped at ₹300 per transaction | Merchant, through its acquiring bank |
| Small merchant in the P2PM category receiving up to ₹1 lakh per month through UPI QR | Zero MDR on all transactions, including those above ₹2,000, while the merchant remains in the exempt category | No MDR is due |
These rates and categories are set out in the Ministry’s FAQ and its 15 September 2026 release. The FAQ describes the small-merchant fund’s operational design as pending, so the zero-MDR category should not be taken to mean that every merchant can self-classify without the applicable process.
The ₹2,000 threshold and the ₹75,000 cap tier do different jobs. The first separates P2M payments that remain MDR-free from those that may be chargeable. The second limits the standard percentage MDR for large transactions: 0.4% of ₹75,000 is ₹300, and the stated cap prevents the standard MDR from rising beyond ₹300 on transactions of ₹75,000 and above. The specified capital-market rate has its own ₹300 cap. The flat ₹5 treatment for listed essential and thin-margin sectors is not the general percentage rate.
How to work out which case applies
- Identify the payment type. A transfer between individuals is P2P; a payment from a user to a merchant is P2M. The Ministry says P2P transfers remain free regardless of amount.
- For P2M, check the amount. Payments of ₹2,000 or less remain free of MDR under the scheduled framework. Payments above ₹2,000 may fall under a general or special-category rate.
- Check the merchant’s classification. A merchant in the P2PM small-merchant category with monthly UPI QR receipts up to ₹1 lakh is described as having zero MDR on all transactions, including transactions above ₹2,000, while it remains in that exempt category.
- Check the business category. The listed essential and thin-margin sectors have a flat ₹5 rate above ₹2,000; the specified capital-market categories have a 0.02% rate capped at ₹300. Do not assume the general 0.4% rate applies to these listed cases.
- If no special treatment applies, use the general rate. For general P2M payments above ₹2,000, the announced rate is 0.4%, with a ₹300 cap for transactions of ₹75,000 and above.
The framework’s announced rates do not, by themselves, explain every account-level classification or settlement procedure. Merchants should confirm their category and the treatment shown by their acquiring bank when the framework commences.
For a merchant reviewing a charge, a practical comparison is to line up four facts before deciding whether the amount looks consistent with the announcement: payment type, transaction value, merchant classification and business category. For example, “above ₹2,000” does not settle the question if the merchant is in the P2PM exempt group or belongs to one of the listed special categories. Likewise, a sector name alone may not establish how a particular merchant account is classified; the FAQ does not provide a full account-level classification or settlement procedure.
Worked examples
General merchant, ₹3,000 purchase
At the scheduled general P2M rate, 0.4% of ₹3,000 is ₹12. The merchant pays that MDR through its acquiring bank. The customer should not be charged an extra ₹12 as an MDR surcharge.
Payment at or below ₹2,000
A P2M payment of ₹2,000 or less remains free of MDR under the announced framework. The fact that the recipient is a merchant does not, on its own, trigger the general above-₹2,000 rate.
Large general P2M transaction
For a general merchant transaction of ₹75,000, 0.4% equals ₹300, the stated maximum for transactions at that value and above. The cap is relevant to the standard rate; it should not be confused with the separate 0.02%-with-₹300-cap treatment for specified capital-market payments.
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If the merchant receives up to ₹1 lakh per month through UPI QR and remains in the described P2PM zero-MDR category, the FAQ says the exemption covers all transactions, including one above ₹2,000. This is a classification-based exemption, not a general rule for every small business.
Listed sector payment above ₹2,000
A qualifying payment to a merchant in a listed essential or thin-margin sector is described at a flat ₹5, rather than the general percentage rate. The FAQ names railways, telecommunications, insurance, fuel and agricultural inputs.
Specified capital-market payment
Payments in the named capital-market categories—mutual funds, securities, stockbrokers and dealers—are described at 0.02%, subject to a ₹300 per-transaction cap. This is a distinct category, not a general rate for every investment-related or high-value payment. The applicable merchant and transaction classification still matters.
What customers should know
- MDR is a merchant-side fee. The Ministry says merchants cannot pass it on to customers who pay through UPI.
- A purported UPI surcharge is not the stated MDR. If a merchant separately adds an amount and calls it MDR, that conflicts with the Ministry’s stated rule. The FAQ says banks have been advised to ensure merchants do not pass on the charge.
- Do not confuse UPI with a credit product linked to UPI. The FAQ says the amendment it describes applies to direct user-account-to-merchant-account UPI transactions. Credit-linked UPI products operate under separate credit-product rules, so their terms should be checked separately.
- Existing QR equipment is not said to require replacement. The Ministry FAQ says existing physical QR stands and QR infrastructure continue to work; replacing a stand does not change MDR.
- A payment application fee is a separate question from merchant MDR. The Ministry FAQ says UPI application providers are prohibited from charging a platform fee or hidden charge for UPI payments. The announced MDR itself is paid on the merchant side, not by adding an MDR line to the customer’s bill.
What merchants should check before the start date
The Ministry’s FAQ gives the scheduled rate framework, but the retrieved material does not set out all operational details for assigning merchant classifications or settling fees. A merchant should therefore confirm with its acquiring bank how the merchant account is categorized, whether the small-merchant P2PM exemption applies, and which of the listed sector treatments is being used. The monthly ₹1 lakh criterion refers to receipts through UPI QR in the stated category; it is not simply a general turnover description for every business.
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Merchants do not need to assume that a QR stand must be replaced to accommodate the framework. The FAQ says existing physical QR stands and QR infrastructure continue to work. Buying a new stand is an optional equipment decision, not a requirement stated in the MDR material, and it does not change the rate or determine exemption status.
Because the commencement date is 15 October 2026, merchants and customers reading this on 13 October should treat the listed rates as scheduled. The final Gazette notification and operative NPCI circular were not available in the cited source set, and the Ministry says the small-merchant fund’s operational design is pending. For that reason, detailed claims about legal enactment mechanics or account-by-account implementation should wait for the relevant instruments and bank guidance.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why older statements about free UPI need a date
Earlier government statements describe an earlier policy period. On 18 April 2025, the Ministry said MDR had been removed from P2M UPI effective January 2020 and rejected claims of GST on UPI payments above ₹2,000. On 18 August 2025, a Lok Sabha answer described the then-current position under section 10A and said there was then no proposal to impose UPI transaction charges. Those statements should not be read as disproving a later framework announced in 2026.
On 8 August 2026, the Ministry described the Taxation and Other Laws (Amendment) Bill, 2026 as proposing an amendment to section 10A, with an MDR decision to be made by the relevant committee if Parliament passed the bill. The current FAQ subsequently announced a finalized framework and a 15 October 2026 start date. The final amending Gazette notification and operative NPCI circular are not established by the cited Ministry material here, so the precise statutory enactment history and implementation mechanics should not be inferred beyond the dated official statements.
The Ministry estimates that approximately 96% of merchant transactions will be unaffected by the new framework. That is a government estimate, not a measured result after commencement. The Ministry’s description of how many transactions are unaffected does not replace checking the specific payment and merchant category.
Government support for UPI also has a separate history from the MDR rules. The 2025 Ministry release reported incentive payouts of ₹1,389 crore in FY2021–22, ₹2,210 crore in FY2022–23 and ₹3,631 crore in FY2023–24. These figures describe incentive payouts for those financial years; they are not MDR rates, taxes, or amounts paid by an individual customer at checkout.
What the MDR fee is—and is not
MDR is a charge connected with accepting specified merchant payments, paid by the merchant and distributed through payment-system participants. It is not a government tax, not a fee that the customer is required to pay separately, and not proof that every UPI payment attracts a charge. Under the schedule announced in September 2026, P2P transfers and P2M payments up to ₹2,000 remain MDR-free; the cases above that threshold depend on the merchant and transaction categories described by the Ministry.
Frequently Asked Questions
Will customers pay UPI MDR?
No. The Ministry says the merchant pays MDR through its acquiring bank and merchants may not pass it on to customers. Banks have been advised to ensure merchants do not pass the charge on.
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No. P2P transfers remain free regardless of amount. For P2M payments, the scheduled treatment depends on merchant classification and category as well as value. Qualifying P2PM small merchants may have zero MDR, and listed sectors have separate rates.
What is the scheduled MDR for a general merchant payment above ₹2,000?
The announced general P2M rate is 0.4%, capped at ₹300 for transactions of ₹75,000 and above. The fee is borne by the merchant, not added as a customer MDR surcharge.
Are UPI payments a tax, or do they attract GST above ₹2,000?
MDR is not a tax collected by the Government or NPCI. A 18 April 2025 Ministry release rejected claims of GST on UPI payments above ₹2,000. That older statement concerns the earlier policy period; the 2026 MDR framework is scheduled to commence on 15 October 2026.
Do merchants need to replace their QR stands?
No replacement requirement is stated. The Ministry FAQ says existing physical QR stands and QR infrastructure continue to work. Changing a QR stand does not change MDR.
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The FAQ says the described amendment applies to direct user-account-to-merchant-account UPI transactions. Credit-linked UPI products operate under separate credit-product rules, so users should check the terms for the particular product.
The Bottom Line
Bottom line: As of 13 October 2026, India’s announced UPI MDR framework is scheduled to start on 15 October. It keeps P2P transfers and P2M payments of ₹2,000 or less free of MDR, while setting different treatments for certain larger merchant payments. Where MDR applies, the merchant pays it through its acquiring bank; the Ministry says it cannot be passed on to the customer. Check payment type, amount, merchant classification and sector before assuming which rate applies.
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