UPI Payments Above ₹2,000 to Cost Merchants 0.4% from October 15; Small Vendors Stay Exempt

The National Payments Corporation of India (NPCI) has introduced a 0.4% charge that most merchants will have to pay banks and payment processors on Unified Payments Interface (UPI) payments they receive above ₹2,000 per transaction. The change was announced in a circular issued on Tuesday.

The charge, known as the Merchant Discount Rate (MDR), will take effect from October 15, 2026.

Under the new framework, person-to-person (P2P) UPI transactions will remain free, as will all person-to-merchant (P2M) transactions of up to ₹2,000 made through UPI or RuPay debit cards. The Ministry of Finance said P2P transactions account for 37% of total UPI transactions by volume and 70% by value.

"For person-to-person (P2P) transactions, there will be no charges at all, irrespective of transaction value," the Ministry said in a release. "Charges will apply only to person-to-merchant (P2M) transactions exceeding ₹2,000."

The change marks a shift from the arrangement in place since January 2020, when zero MDR was mandated for UPI and RuPay debit card payments in order to encourage digital adoption. The government has said the new structure is designed to keep the bulk of payments free while giving the payments ecosystem a sustainable revenue stream.

The 0.4% MDR will be "shared amongst the payment ecosystem partners, including banks and app providers", the release said. For transactions of ₹75,000 and above, the MDR will be capped at ₹300 per transaction.

The government also said banks have been advised to ensure that merchants do not pass on MDR charges to customers — a concern that had been raised widely while the proposal was under public discussion.

Small merchants receiving up to ₹1 lakh a month through UPI QR codes, under the Person-to-Person Merchant (P2PM) classification, will pay no MDR on any UPI transactions they receive. "This bridges informal street vendor setups with formal merchant acquiring accounts, promoting digital adoption in the unorganised sector," the government said.

Certain essential sectors will attract a flat charge rather than a percentage. Transactions above ₹2,000 in Railways, telecom, insurance, fuel and agriculture inputs will carry a flat MDR of ₹5 per transaction. "This flat-rate model ensures cost stability in critical public services and thin-margin industries," the Ministry said.

Payments towards mutual funds, securities, stock brokers and dealers will attract an MDR of 0.02%, capped at ₹300. The government said this reduced rate is intended to encourage retail participation in formal financial markets.

"The new MDR framework will make UPI self-sustainable, give incentives for further expansion in rural and semi-urban areas and maintain competitiveness, while ensuring that a large majority of payments remain free of charge," the Finance Ministry said.

Citing its own data analysis, the Ministry said only 4% of merchant transactions will be affected by the introduction of MDR, since most transactions either fall below the ₹2,000 threshold or qualify under the zero-MDR P2PM framework.

A dedicated fund to promote the use of UPI by small merchants will also be set up, financed by 5% of total MDR collections. "This initiative will expand UPI acceptance, encourage sustained usage, and accelerate the inclusion of small businesses in India's digital payments ecosystem," the government said.