UPI Users Take Note: New 0.4% MDR Rule Kicks In From October 15
The government has introduced a 0.4 per cent Merchant Discount Rate (MDR) on UPI payments of more than Rs 2,000 made to merchants, ending nearly six years of zero-MDR UPI merchant transactions. The new framework will come into effect from October 15.
However, consumers will continue to use UPI without paying any transaction fee. Person-to-person (P2P) transfers and small-value merchant payments will also remain outside the new MDR regime.
“Customers will not be required to pay any charge when making such payments through UPI,” the Finance Ministry said, adding, “MDR is a charge within the merchant payment ecosystem. It is not a charge on customers making UPI payments.”
Individuals will also continue to have “unlimited free usage, with no monthly quotas, volume restrictions or tiered caps on free UPI transactions”, the ministry said.
The announcement drew criticism from opposition parties. Congress leader Rahul Gandhi alleged that the move was “once again surrender” by a “compromised” Prime Minister Narendra Modi to American pressure. The BJP, however, accused the Congress of spreading “fake news” and stressed that MDR would not be charged to consumers.
What changes from October 15?
Under the revised framework, a 0.4 per cent MDR will apply to person-to-merchant (P2M) UPI transactions above Rs 2,000. The charge will be capped at Rs 300 for transactions of Rs 75,000 and above.
For example, a Rs 3,000 purchase would attract an MDR of Rs 12, while a Rs 50,000 transaction would attract Rs 200. On a Rs 1 lakh transaction, the 0.4 per cent calculation would amount to Rs 400, but the Rs 300 cap would apply.
The MDR will be shared among participants in the payment ecosystem, including banks and app providers. The government and the National Payments Corporation of India (NPCI) have said the revenue will help support investments in infrastructure resilience, innovation, cybersecurity and customer service.
Essential services to pay flat Rs 5 MDR
The framework provides a separate flat MDR of Rs 5 per transaction for payments above Rs 2,000 in essential and thin-margin sectors such as railways, telecom, insurance, fuel and agricultural inputs.
These categories account for nearly 17 per cent of P2M transaction volume but around 46 per cent of P2M transaction value, according to the reported framework.
The flat-fee treatment also extends to certain government utility bill payments, including electricity, water and piped gas, as well as educational fee payments such as school tuition and university fees above Rs 2,000.
Payments involving mutual funds, securities, stockbrokers and dealers will attract a lower MDR of 0.02 per cent, capped at Rs 300.
P2P UPI payments remain free
Person-to-person UPI transfers will continue to carry zero charges, irrespective of the transaction amount.
P2P transactions account for around 37 per cent of UPI transaction volume and 70 per cent of its transaction value, according to the government framework.
P2M transactions of up to Rs 2,000 will also remain outside the MDR regime. The government has said such low-value payments account for more than 95 per cent of UPI merchant transaction volume.
Small merchants remain exempt
Small merchants receiving up to Rs 1 lakh a month through UPI QR codes under the Person-to-Person-Merchant (P2PM) framework will continue to pay zero MDR.
The exemption is aimed at protecting smaller vendors and expanding digital payments among small businesses, particularly in smaller and rural markets. The government has also proposed a dedicated fund to support digital payment infrastructure for small merchants.
Acquiring banks will monitor inward UPI payments, and merchants crossing the Rs 1 lakh monthly threshold for three consecutive months will move into the standard P2M category.
Consumers cannot be charged
The government has also taken steps to prevent merchants or payment providers from passing the MDR on to customers.
“UPI app providers are explicitly prohibited from levying platform fees or hidden charges,” the Finance Ministry said. “Banks have been advised to ensure that merchants do not pass MDR charges to customers for UPI payments.”
There will also be no monthly quotas, volume restrictions or tiered caps on free UPI transactions for individuals.
Existing daily transaction limits of Rs 1 lakh to Rs 5 lakh, depending on the category, will continue to function as risk-management measures rather than commercial charge limits.
Credit-linked and recurring payments
The new MDR applies to direct user-account-to-merchant-account UPI payments. Credit-linked transactions, including RuPay Credit Cards on UPI and pre-sanctioned credit lines, will continue to follow separate rules.
Automated recurring payments through UPI mandates or AutoPay, such as utility bills, OTT subscriptions and recurring investments, will also follow separate treatment under the framework.
Why has UPI MDR been reintroduced?
The zero-MDR regime was introduced in January 2020 to encourage digital payments. Banks, fintech companies and payment service providers have subsequently raised concerns about the long-term sustainability of operating the UPI ecosystem.
The government has supported UPI through budgetary incentives since 2021 instead of charging merchants. The new framework is intended to create a revenue stream for payment ecosystem participants while keeping consumers and small merchants protected.
The Payments Council of India has previously sought a review of the zero-MDR policy, while banks and other industry participants have also argued for a sustainable revenue model.
RBI Governor Sanjay Malhotra has previously said that “someone has to pay the cost”, while noting that the decision on MDR ultimately rests with the government.
The revised framework therefore introduces charges selectively rather than applying a blanket fee across all UPI transactions.
The government has said the new revenue mechanism will support the long-term sustainability of UPI, including investments in cybersecurity, infrastructure, innovation and expansion of digital payments. ALSO READ: India-New Zealand FTA Likely to Take Effect on October 19
