UPI sets charges for merchant payments above ₹2,000, caps fee at ₹300

THE finance ministry on Tuesday announced that a 0.4% merchant discount rate (MDR) will apply to person-to-merchant (P2M) UPI transactions above ₹2,000, while person-to-person (P2P) transactions will remain free irrespective of their value.

For transactions of ₹75,000 and above, the MDR will be capped at ₹300 per transaction, the ministry said in a statement.

The announcement brings to a close months of discussions over charges for higher-value UPI transactions. The new framework follows the government’s decision on Monday to keep UPI transactions of up to ₹2,000 free of MDR, with banks and payment system providers barred from imposing direct or indirect charges on such transactions.

Only 4% of merchant transactions will be affected by the introduction of MDR, according to the statement, as most transactions either fall below the ₹2,000 threshold or qualify for zero MDR under the P2PM framework for small merchants.

“P2P transactions constitute 37% of the total UPI transactions in volume terms and 70% in value terms," the finance ministry said in a release. It added that the decision followed deliberations by NPCI’s UPI steering committee on operational parameters, fee distribution models and category caps.

The ministry also clarified that no transaction fee, platform fee or other charge can be imposed on individuals sending or receiving money through UPI. Small merchants, including street vendors and neighbourhood shops, receiving up to ₹1 lakh a month through UPI QR codes under the person-to-person-merchant (P2PM) category will continue to be covered by the zero-MDR framework.

Further, auto-debit recurring payments like utility bills or mutual fund subscriptions, known as UPI Mandates or AutoPay, will not carry the prescribed MDR transaction charges.

The new MDR framework and threshold structure will come into effect from 15 October, giving acquiring banks, payment aggregators, fintech applications and corporate accounting platforms time to update their software engines and billing systems, according to the statement.

India’s UPI platform processed 241.6 billion transactions worth ₹314.2 lakh crore in FY26, up 30% from a year earlier in volume and 21% in value. UPI had more than 55 crore users as of August 2026, according to NPCI data.

The platform processed 24.5 billion transactions worth ₹29.8 lakh crore in August 2026, up 22% in volume and 20% in value from a year earlier. P2M transactions accounted for 30% of total UPI transaction value in August, with transactions of up to ₹500 accounting for 16% and those between ₹501 and ₹2,000 for 17%.

In volume terms, P2M transactions accounted for 63% of UPI transactions, of which 86% were below ₹500 and another 10% were between ₹501 and ₹2,000, according to the latest NPCI data.

Cost competitiveness

Transactions above ₹2,000 in essential and thin-margin sectors, including railways, telecommunications, insurance, fuel, utility-bill payments, educational fees and agricultural inputs, will attract a flat MDR of ₹5 per transaction. Payments relating to mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02%, capped at ₹300 per transaction.

The ministry clarified that MDR is neither a tax nor a charge collected by the government or NPCI. It will instead be distributed among ecosystem participants, including banks, payment service providers and UPI application providers.

According to the NPCI FAQ, the MDR will be used to invest in infrastructure resilience, innovation, cybersecurity and customer service. The intent is to keep UPI accessible and convenient for everyday transactions while supporting the long-term sustainability of the ecosystem.

Individuals will continue to have unlimited free usage of UPI, with no monthly quotas, volume restrictions or tiered caps on free transactions.

The UPI MDR is structured to be much lower than traditional card-based transaction fees. Standard credit card MDRs typically range from 1.5% to 2.5% per transaction, while debit card MDRs are capped at up to 0.90%.

“UPI remains the most affordable digital payment acceptance tool for commercial enterprises. This cost difference helps merchants lower their payment processing expenses while accepting digital transactions,” NPCI said.

Dedicated fund for small merchants

NPCI also notified that 5% of the total MDR earned will be set aside in a dedicated fund for small merchants. The fund will be used to subsidise and accelerate digital payment infrastructure in Tier 3-6 centres, including the North-East states, Jammu & Kashmir and Ladakh, as well as in Tier 1 and 2 centres.

The fund will also support some notified central government schemes.

“This fund will also be utilised to extend financial assistance to the ecosystem players for merchant onboarding and incentivise growth of UPI transactions among existing small merchants,” NPCI said.

The fund will provide incentives for UPI transactions originating from small merchants, particularly in rural areas and Tier 3 centres and beyond, to encourage sustained usage, increase digital payment penetration and accelerate the inclusion of small businesses in the digital payments ecosystem.

The detailed framework for the fund will be finalised in consultation with the Reserve Bank of India within the next three months.