UPI MDR Decoded: What Changes and Who Is Affected?

SEBI Registered Name - Kotak Mahindra Mutual Fund
SEBI Registered Number - MF/038/98/1

Since its launch in 2016, UPI has fundamentally changed the way India transacts. What began as a simple bank-to-bank payment system today powers everything from daily retail purchases and utility bill payments to investments, subscriptions and e-commerce transactions. Its scale, convenience and ubiquity have made it one of the most successful examples of digital public infrastructure globally.

Effective 15th October 2026, a Merchant Discount Rate (MDR) framework will apply to select UPI merchant transactions. However, according to recent media reports, the implementation of MDR on select UPI transactions, could get deferred for few months after industry stakeholders sought additional time to adapt to the proposed fee framework. While UPI continues to remain free for consumers, the introduction of MDR for certain merchant categories brings into focus an important question: how does a payments ecosystem balance widespread accessibility with the economics of operating at such large scale? Understanding the framework, the transactions covered under it and its impact on different stakeholders is therefore increasingly relevant.

That is what we explore in this blog.

What is Merchant Discount Rate (MDR)?

Merchant Discount Rate, or MDR, is the fee paid by a merchant to the acquiring bank or payment-services ecosystem for processing digital payment. Multiple participants support each transaction, including the acquiring bank, issuer bank, payment service provider and app provider. Under the revised framework, the standard MDR on eligible UPI P2M transactions is capped at 0.40%, with defined ecosystem-level distribution.
Source: National Payments Corporation of India (NPCI)

Why Was MDR Not Introduced Earlier and Why Now?

UPI's initial focus was on driving adoption and expanding digital payments. The zero-MDR framework lowered acceptance costs for merchants, encouraged QR-code deployment and helped scale the ecosystem rapidly. Today, UPI processed an astonishing 2,451 crore transactions valued at ₹29.9 lakh crore in August 2026 alone. As the ecosystem has grown in scale and complexity, the MDR framework introduces a revenue-sharing mechanism for select merchant transactions, aimed at supporting payment infrastructure, security, innovation and merchant servicing, while continuing to keep UPI free for consumers. Industry estimates indicate that maintaining UPI payment operations, server bandwidth, fraud prevention systems, and bank technical support costs around ~₹20,000 crore annually. Relying solely on fiscal budget allocations creates funding uncertainty and limits long-term technology investments by banks and fintech.
Source: National Payments Corporation of India (NPCI)

What are the new UPI rules?

The new framework will introduce MDR for specified P2M UPI transactions above ₹2,000. MDR, or Merchant Discount Rate, is a fee associated with accepting a digital payment.

Under the new framework:

• UPI P2P payments will continue to be free.
• P2M transactions up to ₹2,000 will remain free of MDR.
• A 0.4% MDR will apply to specified P2M transactions above ₹2,000.
• For transactions of ₹75,000 or more, MDR will be capped at ₹300 per transaction.
• Eligible small merchants under the P2PM framework will continue to receive zero MDR.
• The new framework is scheduled to come into effect from 15 October 2026.

The ₹2,000 threshold is not a new UPI transaction limit. It is an MDR threshold for specified merchant transactions.
Source: National Payments Corporation of India (NPCI)

Who Pays and Who Is Exempted Under the New Framework?

1. Consumers

No change. UPI remains free for consumers, and merchants cannot directly pass MDR charges to customers. Customers scanning a merchant QR will not be charged with MDR, and merchants are not permitted to add MDR to the customer’s bill.

2. Small Merchants (P2PM)

Continue to enjoy zero MDR if monthly inward UPI QR collections remain within ₹1 lakh and eligibility conditions are met. The merchants exceeding ₹1 lakh in monthly inward UPI receipts for three consecutive months are transitioned to the P2M category.

3. Regular and Large Merchants

Transactions above ₹2,000 attract MDR of 0.40%, subject to a cap of ₹300 per transaction.

4. Capital Market Transactions

Mutual funds, brokers and securities transactions attract MDR of 0.02%, capped at ₹300.

5. Specified Sectors

Categories such as fuel, railways, utilities, insurance, education and tolls attract a flat MDR of ₹5 on eligible transactions above ₹2,000.

Person-to-Person-Merchant (P2PM), Unified Payments Interface (UPI), QR (Quick Response) code, Person-to-Merchant (P2M)

Capital-Market UPI Transactions Get a Materially Lower Rate

How Much of UPI Activity May Be Affected?

While the MDR framework has attracted significant attention, its direct impact may be more limited than many assume. Payments below ₹2,000 account for more than 95% of UPI merchant transaction volumes, indicating that most routine merchant payments are likely to remain outside the MDR framework. As a result, only around ~4% of UPI merchant transactions by count could potentially attract MDR. However, these transactions tend to be higher-ticket payments and could account for approximately ~15%-20% of merchant GMV. This highlights an important distinction: the framework targets a relatively small proportion of transactions by volume, but a more meaningful share of transaction value.

Merchant payments account for nearly 63% of UPI transaction volumes but only around 30% of transaction value, reflecting the dominance of smaller-ticket merchant payments on the network. While merchant transactions account for the majority of transaction volumes, they represent a smaller share of overall transaction value. Consequently, the MDR framework is targeted at select merchant transactions rather than the broader UPI ecosystem.
Source: NPCI, Motilal Oswal Research Report | 16 Sept 2026

How Is MDR Shared Across the Ecosystem?

For standard eligible P2M transactions, the circular sets MDR at not more than 0.40%. It specifies interchange of 0.28%, a PSP fee of 0.12% and an app-provider fee of 0.08% within the distribution mechanism. The stated rates are exclusive of applicable GST. Where an authorized payment aggregator acquires the merchant, the acquiring bank’s share is divided between the acquiring or sponsor bank and the payment aggregator under their commercial agreement. The released circular also proposes a dedicated fund for merchants with annual turnover up to ₹20 lakh. Each participating entity is expected to contribute 5% of its MDR share, excluding industry-program categories. The detailed framework is to be finalised with the Reserve Bank of India within the next three months, while the MDR rate and distribution mechanism will be reviewed periodically.

What Could Change for the Payments Ecosystem?

One immediate effect of the framework is the creation of a revenue pool linked to select merchant transactions. This provides an additional source of revenue for ecosystem participants, including banks, payment aggregators, PSPs and app providers, and could support investments in merchant onboarding, infrastructure, security and fraud prevention. An industry research view is that the change could increase competition for higher-value merchant transactions and improve the economics of entities with acquiring capabilities. At the same time, broad exemptions and concessional treatment for certain categories mean that many routine transactions remain outside the scope of MDR.

Daily low-value payments, consumer transfers and eligible small merchants continue to be protected under the framework. The framework's long-term impact will depend on factors such as implementation, merchant classification, transaction mix, commercial arrangements and future regulatory reviews. A useful international comparison is Brazil's Pix, where participating financial institutions may charge businesses for receiving payments. In contrast, UPI has largely operated under a zero-MDR framework for most merchant transactions.
Source: KMAMC Internal, paymentsdatabase.com

Conclusion

The UPI MDR framework should not be viewed as the end of free UPI. Consumers will continue to enjoy free UPI payments, while eligible small merchants will continue to benefit from zero-MDR protection. Instead, the framework introduces differentiated pricing for select merchant transactions, with MDR applicable primarily to specified merchant categories and higher-value transactions. UPI's first decade was defined by rapid adoption, scale and widespread acceptance across consumers and merchants. As the ecosystem continues to evolve, the MDR framework represents an important development in its operating model. Its long-term success will depend on its ability to balance accessibility and affordability with the needs of a growing payments ecosystem.

A well-calibrated MDR framework could support continued investments in payment infrastructure, merchant onboarding, cybersecurity, fraud prevention and innovation, while preserving the simplicity and convenience that have made UPI a preferred payment method for millions of Indians. Ultimately, the objective will be to ensure that UPI remains secure, resilient and inclusive as it enters its next phase of growth.

Mr. Umang Shah, Vice President, Equity Research at Kotak AMC, adds: As they say “all good things come at a price”. UPI has brought in great deal of value and convenience not just for consumers, but for all the stakeholders within the ecosystem. However, UPI needs a sustainable economic model to support its scale. Notably, the UPI MDR is more value accretive than other point of sale payment methods, given its convenience and despite 95% of the transactions being excluded from the MDR net. Moreover, these revenues should help in recovering massive infrastructure costs, fund cybersecurity and build fraud prevention mechanisms among others. The MDR on UPI should not be seen as a large profit pool for the industry but rather it’s possibly the only way to sustain the payments infrastructure and incentivise continued private capex in the space.

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