New Delhi: A day after the Centre notified that UPI transactions up to Rs 2,000 would attract no charges, the government and the National Payments Corporation of India (NPCI) have issued further clarifications on how the new Merchant Discount Rate (MDR) framework will work, addressing concerns over whether ordinary UPI users and small merchants will have to pay for digital transactions.
The clarification makes an important distinction between different types of UPI payments. Person-to-person (P2P) transfers will continue to remain completely free irrespective of the amount, while person-to-merchant (P2M) payments of up to Rs 2,000 will also carry zero MDR. Charges under the new framework will primarily apply to commercial merchant transactions above the Rs 2,000 threshold.
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- P2P UPI transfers remain completely free, irrespective of the amount.
- Merchant payments up to Rs 2,000 remain free with zero MDR.
- Commercial merchant payments above Rs 2,000 attract 0.4% MDR, payable by the merchant, not the customer.
- Small merchants receiving up to Rs 1 lakh a month under the P2PM category continue to get zero MDR.
- Essential services get a concessional Rs 5 MDR above Rs 2,000, while separate concessional rates apply to capital-market transactions.
- Consumers cannot be charged a platform fee or have the merchant’s MDR passed on to them.
- The new MDR framework is scheduled to take effect from October 15, 2026.
The clarification follows the September 14 Gazette notification issued by the Ministry of Finance under Section 10A of the Payment and Settlement Systems Act, 2007. The notification specified RuPay-powered debit cards and UPI transactions up to Rs 2,000 as electronic payment modes on which banks or system providers cannot directly or indirectly impose a charge.
In simple language, if you are making a UPI payment to a person or an individual, it stays completely free irrespective of the amount. However if you are paying through UPI for a product to a merchant, than transactions till Rs. 2000 remain free and chargeable thereafter.
The notification had come after an amendment to the PSS Act created a legal framework for the government to determine electronic payment modes where transaction charges would not apply. The amendment had led to widespread confusion and anticipatory concern over whether the zero-MDR regime for UPI was coming to an end.
While the September 14 notification established the Rs 2,000 protection, questions remained over transactions above this amount and whether individuals transferring money to one another would also be affected. The latest clarification provides a more detailed picture of the framework.
NPCI issued its operational circular on September 15, with the final MDR structure scheduled to come into effect from October 15, 2026. The intervening period will allow banks, payment aggregators and fintech applications to make the required changes to their software and billing systems.
Under the framework, P2P transactions will remain free regardless of value. There will be no charge on either the sender or beneficiary. P2P payments currently account for 37% of UPI transaction volume and 70% of the total value of transactions.
For payments made to merchants, the Rs 2,000 threshold becomes important. P2M transactions of Rs 2,000 or less will continue to attract zero MDR, covering more than 95% of P2M transaction volume.
For standard commercial P2M transactions exceeding Rs 2,000, merchants will face a baseline MDR of 0.4%. The amount will be shared among ecosystem participants, including acquiring banks and app providers.
There is also a ceiling for high-value payments. For transactions of Rs 75,000 and above, MDR will be capped at Rs 300 per transaction. This means, for example, that a Rs 1 lakh commercial transaction would attract an MDR of Rs 300 rather than Rs 400 under the standard 0.4% calculation.
Several essential services have been given a substantially lower rate. Payments above Rs 2,000 for designated categories including Railways, telecom, insurance premiums, fuel stations, electricity, water and gas bills, agricultural inputs and educational fees will attract a flat MDR of Rs 5 per transaction.
Capital-market payments will have a separate concessional structure. Transactions involving mutual funds, stockbrokers, securities and asset management companies will attract MDR of 0.02%, capped at Rs 300.
Small merchants have also been given a separate protection under the Person-to-Person-Merchant, or P2PM, category. Micro-merchants receiving up to Rs 1 lakh a month through UPI QR codes directly into personal accounts will continue to have mandatory zero MDR.
Such vendors will not need GST registration to qualify for the exemption. They will also not be required to replace or re-register their existing QR stands or soundboxes as part of the transition.
Acquiring banks will monitor payment activity to determine when a merchant should move from P2PM to the commercial P2M category. Reclassification will take place only when inward UPI payments exceed Rs 1 lakh a month for three consecutive months.
Part of the revenue generated through MDR will also be used to create a dedicated fund to subsidise digital-payment infrastructure in Tier 3 to Tier 6 centres, the North-Eastern states, Jammu and Kashmir and Ladakh, as well as government programmes such as PM SVANidhi and PM Vishwakarma. The operational framework for the fund is to be finalised in consultation with the Reserve Bank of India within three months.
For consumers, the clarification is categorical that routine use of UPI will continue without charges. Individual users will not have to pay for P2P transfers or routine QR-code payments at local stores that fall within the protected categories.
There will also be no monthly quota or volume-based limit on free UPI transactions for consumers. UPI app providers will not be permitted to levy separate platform or service fees on UPI payments, while enterprise merchants cannot pass their MDR liability on to customers as a surcharge at checkout.
Automated recurring payments through UPI AutoPay or mandates, including those used for utility bills, OTT subscriptions and mutual fund SIPs, will also remain exempt from MDR under the clarified framework.
The government has linked the change to the growing cost of maintaining the UPI ecosystem. UPI processed 2,451 crore transactions worth Rs 29.9 lakh crore in August 2026 alone, while the payment system operates across 11 foreign countries. Maintaining the infrastructure — including servers, cybersecurity, AI-based fraud detection and banking support — is estimated to cost around Rs 20,000 crore annually.
The new framework is aimed at gradually moving the ecosystem from dependence on government budgetary subsidies towards a commercial model in which larger merchant transactions contribute towards the cost of maintaining and expanding the payment network.
The proposed 0.4% standard MDR remains below the stated rates for traditional card payments, with credit-card MDRs ranging between 1.5% and 2.5% and debit-card MDR capped at up to 0.90%.
For most individual UPI users, therefore, the clarification means there is no change in the cost of sending money to another person. For merchant payments, transactions up to Rs 2,000 remain protected from MDR, while small vendors covered by the P2PM category also retain zero-MDR protection. The principal change from October 15 will be for larger commercial merchant payments above the specified threshold.
