The National Payments Corporation of India (NPCI) has introduced a 0.4% Merchant Discount Rate (MDR) on most UPI person-to-merchant (P2M) transactions above ₹2,000. This change impacts the cost structure for digital payments, with merchants responsible for paying the charge to banks and payment processors. Person-to-person (P2P) UPI transactions remain free, regardless of the amount.
Currently, P2P transactions represent about 37% of UPI transactions by volume and 70% by value. Transactions up to ₹2,000 between customers and merchants will also be exempt, as will payments to small merchants under the P2PM framework who receive up to ₹1 lakh per month via UPI QR codes. The government estimates that only around 4% of merchant transactions will incur the new charge, limiting its impact on the UPI ecosystem.
The MDR framework sets special rates for certain sectors. Transactions above ₹2,000 in railways, telecom, insurance, fuel, and agriculture inputs will incur a flat ₹5 MDR. Payments involving mutual funds, securities, stock brokers, and dealers will have a lower 0.02% MDR capped at ₹300 per transaction. For other eligible transactions of ₹75,000 or more, the 0.4% MDR is capped at ₹300.
The Finance Ministry stated the MDR will be distributed among banks, app providers, and other participants, and banks are instructed to ensure merchants do not pass the charge to customers. The government aims for the new framework to make UPI more self-sustainable, encourage investment in rural and semi-urban areas, and maintain the system's competitiveness. Additionally, a dedicated fund will be created from 5% of total MDR collections to promote UPI uptake among small merchants and boost digital payment acceptance in the unorganised sector.
