UPI Charges and MDR Rules 2026: Who Will Pay and Who Is Exempt?

UPI has become the preferred payment method for millions of Indians. From paying a roadside vendor to purchasing electronics, settling restaurant bills, and transferring money to family members, UPI has made digital payments quick and convenient.

The Government of India announced a revised Merchant Discount Rate framework for selected UPI merchant transactions on 15 September 2026. The announcement created confusion among users, with many believing that every UPI payment above ₹2,000 would attract an additional charge.

That is not the case.

Ordinary customers will continue to make UPI payments without paying transaction charges. Person-to-person transfers will also remain free, irrespective of the amount transferred. The new merchant discount rate applies only to specified person-to-merchant transactions, and the cost must be borne by eligible merchants.

The revised framework is scheduled to take effect on 15 October 2026. Here is a detailed explanation of the new UPI charges, applicable rates, exemptions, and their potential impact on customers and businesses.

What Is a Merchant Discount Rate?

Merchant Discount Rate, commonly known as MDR, is a payment-processing fee charged to a merchant when a customer completes a digital transaction.

When a merchant accepts an eligible UPI payment, a small portion of the transaction value may be deducted before the final settlement. The amount is distributed among participants involved in processing the payment, which may include:

• The merchant’s acquiring bank
• The customer’s bank
• Payment service providers
• UPI application providers
• Other eligible payment-infrastructure participants

MDR is not a government tax. It is a fee within the payment ecosystem that supports the operation and development of digital-payment infrastructure.

Under the new rules, customers are not responsible for paying the UPI MDR. The eligible merchant receiving the payment will bear the applicable processing cost.

Why Has MDR Been Introduced on Selected UPI Payments?

UPI processes billions of transactions every month. According to the official Ministry of Finance FAQs, UPI processed approximately 2,451 crore transactions valued at around ₹29.9 lakh crore in August 2026 alone.

Handling payments at this scale requires substantial investment in:

• Banking infrastructure
• High-capacity servers
• Cybersecurity systems
• Fraud-detection technology
• Customer support services
• Transaction monitoring
• Network reliability
• Payment dispute management

The government has stated that payment-industry estimates place the annual cost of maintaining the UPI ecosystem at approximately ₹20,000 crore.

The new threshold-based model is intended to generate revenue for maintaining and improving UPI without charging individual users or placing an additional burden on micro and small merchants. The framework targets only a limited category of commercial merchant payments.

According to the Press Information Bureau, approximately 96% of merchant transactions will remain unaffected. MDR is expected to apply to only about 4% of person-to-merchant transactions.

When Will the New UPI MDR Rules Take Effect?

The revised UPI MDR framework will take effect from 15 October 2026.

The period between the announcement and implementation allows banks, payment aggregators, UPI applications, and merchants to update their:

• Billing systems
• Payment-processing engines
• Accounting platforms
• Merchant agreements
• Settlement reports
• Reconciliation processes

Businesses should use this time to confirm their merchant classification and applicable MDR rate with their acquiring bank or payment service provider.

Who Will Pay MDR on UPI Transactions?

The customer making the payment will not pay MDR.

The charge will apply to eligible merchants receiving certain UPI person-to-merchant payments. Under the standard framework:

• P2M transactions up to ₹2,000 will attract zero MDR.
• Eligible P2M transactions above ₹2,000 will attract 0.4% MDR.
• Transactions of ₹75,000 and above will have a maximum MDR of ₹300.
• Eligible small merchants classified under P2PM will continue to receive zero-MDR protection.

Large retailers, established commercial enterprises, e-commerce businesses, and other organized merchants may come under the standard MDR framework depending on their official merchant classification.

A business should not assume its applicable rate only from its size or industry. Its classification by the acquiring bank or payment service provider will determine whether standard, concessional, or zero MDR applies.

UPI MDR Rates for 2026

The following table provides a simple overview of the announced framework:

The MDR applies to the eligible merchant receiving the payment, not the customer initiating it.

How Will UPI MDR Be Calculated?

The calculation depends on the transaction amount and merchant category.

Example 1: Merchant Payment of ₹1,500

The payment amount is below the ₹2,000 threshold.

• Transaction value: ₹1,500
• Applicable MDR: Zero
• MDR payable by merchant: ₹0

Example 2: Merchant Payment of ₹3,000

The standard MDR rate of 0.4% applies.

• Transaction value: ₹3,000
• Calculation: ₹3,000 × 0.4%
• MDR payable by merchant: ₹12

Example 3: Merchant Payment of ₹50,000

• Transaction value: ₹50,000
• Calculation: ₹50,000 × 0.4%
• MDR payable by merchant: ₹200

Example 4: Merchant Payment of ₹100,000

At 0.4%, the calculated MDR would be ₹400. However, the maximum fee is capped at ₹300 for transactions of ₹75,000 and above.

• Transaction value: ₹100,000
• Calculated MDR: ₹400
• Maximum applicable MDR: ₹300
• MDR payable by merchant: ₹300

The Ministry of Finance FAQs indicate that once an eligible payment exceeds ₹2,000, MDR is calculated using the full transaction value.

Will Customers Pay Charges on UPI Payments?

No. Ordinary users will continue to make UPI payments without paying MDR.

This protection covers:

• Sending money to friends
• Transferring money to family members
• Splitting bills
• Moving money between personal bank accounts
• Scanning merchant QR codes
• Paying online merchants
• Making eligible high-value UPI payments

A customer paying ₹3,000 or ₹30,000 to a merchant should not be charged an additional UPI fee. Where MDR applies, it is the merchant’s payment-processing expense.

UPI application providers are also prohibited from imposing a platform fee or another hidden charge on UPI payments.

Are Person-to-Person UPI Transfers Still Free?

Yes. All person-to-person or P2P UPI transfers will remain free, irrespective of the amount transferred, subject to applicable bank and UPI transaction limits.

P2P transactions include:

• Sending money to a friend
• Transferring money to a family member
• Paying an individual contact
• Splitting a personal expense
• Transferring money between one’s own accounts

The ₹2,000 threshold does not apply to these personal transfers.

For example, transferring ₹10,000 to a family member will not attract MDR because it is a P2P transaction rather than a payment to a commercial merchant.

Are Payments Up to ₹2,000 Exempt?

Yes. All standard Person-to-Merchant UPI payments up to ₹2,000 will remain free from MDR.

This exemption protects a substantial number of everyday transactions, including payments for:

• Groceries
• Local transportation
• Food and beverages
• Medicines
• Small household purchases
• Local services
• Low-value retail transactions

The threshold is based on the value of an individual eligible merchant transaction, not the total number of UPI payments made by a customer during a month.

Individual users will not face monthly quotas or volume-based charging tiers for free UPI usage.

Which Small Merchants Are Exempt from MDR?

Small merchants operating under the Person-to-Person-Merchant, or P2PM, framework will continue to receive zero-MDR protection.

The P2PM category applies to eligible small vendors receiving up to ₹1 lakh per month through UPI QR payments. It is intended to support micro-businesses and merchants in the unorganized retail sector, such as

• Street vendors
• Small neighborhood shops
• Local service providers
• Micro-retailers
• Informal businesses

An eligible P2PM merchant does not automatically become liable for MDR merely because one payment exceeds ₹2,000. The merchant’s overall account classification determines the exemption.

Banks and payment service providers monitor UPI receipts associated with these merchant accounts. According to the official FAQs, a merchant receiving more than ₹1 lakh per month through UPI for three consecutive months may be moved from P2PM to the regular P2M category.

GST registration is not required solely to receive P2PM zero-MDR protection. Eligibility is linked to transaction thresholds and account classification.

Do Small Merchants Need a New QR Code?

No. Existing QR codes will continue to work.

Eligible merchants do not need to replace their QR stands, soundboxes, or payment displays merely because the MDR framework is changing. The applicable rate will be determined through the merchant’s account category and payment-processing arrangement.

However, merchants should contact their bank or payment provider to confirm whether their account is correctly classified as P2PM or P2M.

Special MDR Rates for Essential Sectors

Certain essential and thin-margin sectors will receive a concessional MDR structure.

For eligible transactions above ₹2,000, a flat fee of ₹5 per transaction will apply instead of the standard 0.4% rate. The government has identified categories including

• Railways
• Telecommunications
• Insurance
• Fuel
• Agricultural inputs
• Certain public utilities
• Other notified industry-program merchants

For example, an eligible insurance-premium payment above ₹2,000 may attract a flat ₹5 MDR. The charge is borne within the merchant-payment ecosystem, not by the policyholder.

Similarly, an eligible fuel payment above ₹2,000 will attract a flat ₹5 fee instead of a percentage-based charge. Payments up to ₹2,000 remain free from MDR.

The concessional structure is designed to avoid disproportionately increasing payment-processing expenses for essential services and businesses with narrow margins.

MDR on Capital-Market Transactions

The framework provides a separate MDR rate for eligible capital-market payments made through UPI.

Covered categories include payments relating to:

• Mutual funds
• Securities
• SEBI-registered stockbrokers
• Securities dealers
• Eligible investment platforms
• Other covered capital-market transactions

The MDR for these payments is set at 0.02% of the transaction value, subject to a maximum of ₹300 per transaction.

This is substantially lower than the standard commercial rate of 0.4%. The special structure recognizes that capital-market payments may involve larger transaction values.

Customers or investors should not pay MDR as a separate UPI charge. It remains a merchant-side payment-processing cost.

What About Credit Cards Linked to UPI?

The new 0.4% MDR framework applies specifically to direct bank-account-to-merchant-account UPI transactions.

Payments made using credit products, such as:

• RuPay credit cards linked to UPI
• Pre-approved credit lines on UPI
• Other eligible credit-linked instruments

may operate under separate credit-product and merchant-fee rules.

Users and merchants should not assume that the standard bank-account UPI MDR automatically applies to a credit-linked UPI payment. The applicable charges will depend on the relevant credit-product framework and merchant agreement.

Can Merchants Pass MDR to Customers?

No. Merchants cannot add MDR as a separate fee to the customer’s UPI payment.

If an item is listed at ₹5,000, the customer should pay ₹5,000. The merchant should not ask the customer to pay an additional amount merely because UPI is being used.

Banks have been advised to ensure that merchants do not transfer MDR costs to customers. UPI applications are also prohibited from imposing platform fees or hidden transaction charges.

If a merchant demands an additional UPI fee, the customer should:

1. Ask for an itemized bill.
2. Retain the transaction receipt or screenshot.
3. Raise the concern directly with the merchant.
4. Report an unauthorized charge to the relevant bank or payment provider.
5. Use official grievance channels if the issue is unresolved.

Do UPI AutoPay Transactions Attract MDR?

According to the official FAQs, prescribed MDR does not apply to automated recurring payments made through UPI mandates or AutoPay.

These may include eligible recurring payments for:

• Utility bills
• Subscription services
• OTT platforms
• Recurring financial instructions
• Other authorised monthly payments

The exemption applies to automated recurring instructions covered by the relevant UPI mandate framework. Businesses should still verify the classification of their collection model with their bank or payment provider.

Daily UPI Limits Are Not Transaction Charges

Customers should not confuse daily transaction limits with MDR.

Banks and NPCI may impose daily limits depending on the transaction category, risk controls and the customer’s bank. These may generally range between ₹1 lakh and ₹5 lakh for different types of transactions.

Such limits are security and risk-management controls. They do not mean that users will be charged after completing a specific number of transactions or crossing a monthly payment volume.

There is no monthly quota on free UPI usage for individual consumers under the announced framework.

How Will the New Rules Affect Merchants?

The financial impact will depend on the merchant’s category, payment size and monthly transaction volume.

Eligible larger merchants may experience:

• New payment-processing expenses
• Changes in settlement amounts
• Additional accounting requirements
• A need to update reconciliation software
• Margin pressure on certain transactions
• Questions from customers about UPI charges

Businesses should calculate their expected MDR expenses using actual transaction data instead of assuming that all UPI collections will attract a charge.

The policy may also support improvements across the UPI ecosystem by funding:

• Better cybersecurity
• Faster fraud detection
• Improved application reliability
• Stronger transaction infrastructure
• Wider merchant onboarding
• Better customer support

A dedicated fund is also proposed for expanding UPI acceptance among small merchants. An amount equivalent to 5% of total MDR collections is expected to be contributed to this initiative.

What Should Merchants Do Before Implementation?

Businesses should take the following steps before 15 October 2026:

• Confirm whether the account is classified as P2M or P2PM.
• Ask the acquiring bank for the applicable merchant rate.
• Verify the registered Merchant Category Code.
• Review monthly UPI collections.
• Identify transactions regularly exceeding ₹2,000.
• Update accounting and settlement-reconciliation systems.
• Review payment-aggregator agreements.
• Train billing and customer support teams.
• Avoid adding MDR separately to customer bills.
• Monitor official updates from the Ministry of Finance, RBI and NPCI.

Merchants in essential sectors and capital markets should also confirm whether they qualify for a special or concessional MDR rate.

Common Myths About the UPI Charges

Myth 1: Every UPI Payment Above ₹2,000 Will Be Charged

Fact: Customers will not pay any charge. MDR applies only to specified merchant transactions.

Myth 2: Sending More Than ₹2,000 to a Friend Will Attract MDR

Fact: P2P transfers remain free irrespective of the amount, subject to normal transaction limits.

Myth 3: Every Small Shop Must Pay MDR

Fact: Eligible P2PM merchants receiving up to ₹1 lakh per month continue to receive zero-MDR protection.

Myth 4: MDR Is a Government Tax

Fact: MDR is a payment-processing fee distributed among eligible participants within the UPI ecosystem.

Myth 5: UPI Applications Can Start Charging Platform Fees

Fact: UPI application providers are prohibited from imposing platform fees or hidden charges on UPI payments under the announced framework.

Conclusion

The UPI Charges and MDR Rules 2026 introduce a targeted payment-processing fee while protecting individual users, personal transfers and eligible small merchants.

Customers will continue to make UPI payments without paying transaction or platform fees. P2P transfers remain free, merchant payments up to ₹2,000 attract zero MDR, and eligible P2PM merchants remain exempt.

Standard P2M transactions above ₹2,000 will attract 0.4% MDR, while transactions of ₹75,000 and above will be capped at ₹300. Special rates apply to designated essential sectors and capital-market transactions.

The key point is simple: customers will not pay UPI MDR. Merchants should verify their official classification and applicable rate with their acquiring bank before the framework takes effect on 15 October 2026.