PANAJI: The National Payments Corporation of India (NPCI) has introduced a new Merchant Discount Rate (MDR) framework under which a 0.4% charge will apply to specified person-to-merchant (P2M) UPI transactions above Rs 2,000 from October 15.
The Ministry of Finance clarified that the framework will not affect person-to-person (P2P) transactions. UPI transfers between individuals will remain completely free, irrespective of the amount transferred. “Charges will apply only to person-to-merchant (P2M) transactions exceeding Rs 2,000,” the Ministry said.
P2M transactions up to Rs 2,000 will also remain free. According to the government, about 96% of merchant transactions will remain unaffected, either because they are below the threshold or qualify under the zero-MDR framework for small merchants.
Under the P2PM classification, small merchants receiving up to Rs 1 lakh per month through UPI QR codes will continue to pay no MDR on transactions they receive. The provision is aimed at protecting street vendors, neighbourhood shops and other small businesses from additional payment costs. For specified merchant transactions above Rs 2,000, the MDR will be 0.4%, with a maximum charge of Rs 300 for transactions of Rs 75,000 and above.
The government has said MDR is “neither a tax nor a charge collected by the Government or NPCI”. Instead, it will be distributed among payment ecosystem participants, including banks, payment service providers and UPI application providers. Banks have been advised to ensure that merchants do not pass the MDR cost on to customers. “MDR is a charge within the merchant payment ecosystem. It is not a charge on customers making UPI payments,” the Ministry said.
Certain sectors will have separate rates. Transactions above Rs 2,000 in railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat MDR of Rs 5 per transaction. Payments relating to mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02%, capped at Rs 300 per transaction. The government said the lower rate is intended to encourage continued retail participation in formal financial markets.
The Finance Ministry said P2P transactions account for 37% of UPI transactions by volume and 70% by value. Individuals will continue to have unlimited free UPI usage, with no monthly quotas or volume-based charges. A dedicated fund will also be established to promote UPI adoption among small merchants, with 5% of total MDR collections allocated to it. The fund will support wider UPI acceptance and digital payment adoption among small businesses, including in rural and semi-urban areas.
The government said the framework has been introduced under the Payment and Settlement Systems Act, 2007, following deliberations by the UPI Steering Committee on rates, operational arrangements and consumer safeguards. “The new MDR framework will make UPI self-sustainable, give incentives for further expansion in rural and semi-urban areas and maintain competitiveness, while ensuring that a large majority of payments remain free of charge,” the Finance Ministry said.
The government added that the framework is consistent with the Standing Committee on Finance's 32nd Report, which emphasised the need for a viable revenue model to support the continued growth of the digital payments ecosystem.
