The government will introduce a Merchant Discount Rate on select UPI merchant payments from October 15, 2026. Under the new framework, eligible person-to-merchant transactions above Rs 2,000 will attract an MDR of up to 0.40 per cent.

PhonePe CEO Sameer Nigam said the framework creates a revenue model for banks and payment companies while keeping UPI free for customers. Here are the major provisions:

1. Customers will not be directly charged for making payments through UPI.
2. Person-to-person transfers between friends, relatives and other individuals will remain free.
3. MDR will apply only to eligible person-to-merchant payments.
4. The new rules will take effect on October 15, 2026.

The standard MDR will apply to merchants receiving more than Rs 1 lakh per month through QR-based UPI payments. For these merchants, an individual transaction must exceed Rs 2,000 before the charge becomes applicable.

The following rules determine whether a merchant must pay:

1. Merchants receiving more than Rs 1 lakh monthly through UPI QR codes will fall under the MDR framework.
2. Eligible payments above Rs 2,000 will attract an MDR of up to 0.40 per cent.
3. Transactions of Rs 2,000 or less will not attract MDR.
4. The standard MDR cannot exceed 0.40 per cent of the eligible transaction value.
5. The charge on qualifying high-value purchases will be capped at Rs 300.
6. The merchant receiving the payment will bear the MDR, not the customer making the payment.

The framework includes exemptions to protect customers, microbusinesses and merchants processing smaller payments. According to Nigam, nearly 96 per cent of UPI transactions are below Rs 2,000, meaning most everyday payments will remain outside the MDR system.

The main exemptions are:

1. Customers making payments through UPI will remain exempt from direct transaction charges.
2. Person-to-person UPI transfers will remain free, irrespective of the amount transferred.
3. Merchants receiving up to Rs 1 lakh per month through UPI QR payments will not have to pay MDR.
4. Payments of Rs 2,000 or less will remain exempt, even when made to a merchant covered by the framework.
5. Small shops, street vendors and other micro merchants operating within the monthly threshold will remain protected.
6. Recurring UPI AutoPay mandates and credit-linked UPI payments will continue under their respective charging rules.

Some merchant categories will not be charged the standard percentage-based MDR. Essential services will receive concessional treatment to prevent processing charges from becoming excessive on necessary payments.

The special rates include:

1. Fuel, insurance, railways, telecom and selected utility payments will attract a maximum charge of Rs 5.
2. Capital-market payments will carry a lower MDR of 0.02 per cent.
3. The maximum charge on eligible large purchases will be limited to Rs 300.
4. Further clarification is awaited for wallet-UPI interoperability and certain bill-payment categories.

Banks, payment applications and other service providers incur considerable expenditure to operate UPI. Their costs include servers, cybersecurity, fraud prevention, customer support, KYC compliance and continuous technological upgrades.

The MDR revenue is expected to support the payment network in the following ways:

1. Banks and payment companies will receive revenue to maintain UPI infrastructure.
2. Additional investment can be directed towards fraud detection and cybersecurity.
3. Payment providers can improve servers, transaction capacity and system reliability.
4. The revenue model could reduce dependence on government incentives and subsidies.
5. UPI will continue to carry lower merchant charges than many credit cards, debit cards and digital wallets.
6. The policy seeks to balance free customer access, protection for small merchants and the financial sustainability of India’s digital-payment ecosystem.