MDR Could Push Small Merchants, Price-Sensitive Consumers Back Towards Cash: GTRI

India's Unified Payments Interface (UPI) is set for a significant change from October 15, 2026, when a new Merchant Discount Rate (MDR) will be introduced on certain person-to-merchant transactions above Rs 2,000.

The move has triggered debate among merchants, payment companies, industry groups and policy researchers about its potential impact on India's rapid shift towards digital payments.

Economic think tank Global Trade Research Initiative (GTRI) has warned that the new MDR could push some small merchants and price-sensitive consumers towards cash, particularly where businesses operate on thin margins. GTRI Founder Ajay Srivastava made the observation in a social media post on Wednesday.

The government, however, has maintained that the MDR is a merchant-side payment-processing charge rather than a direct fee on consumers and has ruled out a rollback of the announced framework.

What Is the New UPI MDR?

Under the new framework, eligible UPI person-to-merchant (P2M) transactions above Rs 2,000 will attract an MDR of 0.4%, subject to an overall maximum charge of Rs 300.

The new rules will become effective from October 15, 2026.

For transactions of Rs 75,000 or more, the 0.4% calculation reaches the Rs 300 maximum, meaning the MDR will not increase beyond that amount for the applicable transaction categories.

The charge is applicable within the merchant payment ecosystem and is not designed as a direct transaction fee for consumers.

UPI Payments Below Rs 2,000 Remain Outside the New MDR

The new framework does not impose the 0.4% MDR on eligible P2M transactions of Rs 2,000 or below.

This means consumers making smaller purchases through UPI will continue to use the payment system without the new merchant-side charge.

Person-to-person transfers are also outside the MDR framework, so sending money to friends, family members or another individual will continue to remain free.

Why GTRI Is Concerned About a Shift to Cash

GTRI has argued that the additional cost could become significant for small businesses operating with limited margins.

According to the think tank, merchants may reconsider digital payment acceptance if the cost of processing larger UPI transactions becomes an additional expense.

GTRI Founder Ajay Srivastava said the MDR could push small merchants and price-sensitive consumers back towards cash.

This is an assessment by GTRI rather than a confirmed forecast of future payment behaviour. Whether such a shift occurs will depend on how merchants absorb the cost, how payment providers implement the rules and how consumers respond after the October 15 rollout.

Small Merchants Have Special Protection

The new framework includes an exemption for eligible small merchants.

Merchants classified under the applicable small-merchant criteria, including those receiving up to Rs 1 lakh per month through UPI QR payments, can remain outside the MDR.

This provision is intended to protect smaller businesses and vendors that rely heavily on QR-based payments.

However, retailer organisations have questioned whether the Rs 1 lakh monthly threshold is sufficiently high for many small and medium-sized businesses, particularly during periods of higher sales.

How Much Will Merchants Pay?

The standard MDR for eligible transactions is 0.4%.

Illustratively:

Transaction Value0.4% MDRRs 2,000No standard MDRRs 3,000Rs 12Rs 5,000Rs 20Rs 10,000Rs 40Rs 25,000Rs 100Rs 50,000Rs 200Rs 75,000Rs 300Rs 1,00,000Rs 300 cap

The actual treatment depends on the transaction type, merchant category and applicable exemptions.

Special Categories Will Have Lower Charges

The new framework does not apply the same MDR to every category.

Certain essential and high-volume merchant categories will have a flat concessional MDR of Rs 5 for eligible transactions above Rs 2,000.

The categories reported include:

• Railways

• Telecom services

• Insurance

• Fuel

• Electricity and selected utilities

Capital-market transactions have a separate MDR of 0.02%, subject to a maximum of Rs 300.

These differentiated rates are intended to account for the characteristics of specific payment categories.

Why the Government Supports MDR

The government's position is that the new framework is aimed at improving the financial sustainability of India's UPI ecosystem.

UPI has grown into one of the world's largest real-time payment systems. In August 2026, it processed approximately 24.5 billion transactions worth Rs 29.823 lakh crore, according to official data cited by Reuters.

Operating such a large-scale payment infrastructure requires spending on technology, cybersecurity, fraud prevention, network infrastructure and payment processing.

The new MDR provides a potential revenue stream for participants in the payments ecosystem.

GTRI Says UPI Costs the Government Relatively Little

GTRI has questioned whether government revenue requirements justify changing the zero-MDR model.

According to GTRI Founder Ajay Srivastava, keeping UPI free costs the government approximately Rs 2,000–2,500 crore annually.

He compared this figure with several large government subsidy programmes and argued that the cost of supporting free UPI is relatively small in the context of overall public expenditure. These figures and the interpretation are GTRI's claims, rather than an independent assessment in this article.

GTRI also cited NPCI's FY2025 financial figures, saying the organisation earned Rs 3,270 crore and retained a surplus of Rs 1,552 crore.

GTRI Raises the Issue of Cash Costs

The think tank has also highlighted the costs associated with India's cash economy.

GTRI cited Reserve Bank of India expenditure of Rs 4,875 crore in FY2026 on printing banknotes, while noting that this does not include other costs such as transportation, storage, security, counting and replacement of cash.

Its argument is that encouraging cash use could create costs elsewhere in the financial system.

However, the actual relationship between MDR and cash usage remains uncertain because merchants have multiple ways to respond to the new fee.

Could Merchants Pass the Cost to Consumers?

Although the MDR is formally imposed within the merchant payment ecosystem, businesses may consider the overall cost of accepting digital payments when setting prices.

For a merchant receiving a Rs 10,000 eligible UPI payment, a 0.4% MDR would amount to Rs 40 before considering the applicable cap and category-specific rules.

A merchant could potentially absorb that amount as a business expense, adjust discounts or prices generally, encourage alternative payment methods or reconsider the use of UPI for certain high-value transactions.

The precise response is likely to vary according to business margins, competition and customer preferences.

Why Price-Sensitive Consumers Could Matter

Cash remains relevant for consumers who are highly sensitive to small price differences.

If merchants alter discounts or payment preferences because of the new MDR, some customers could respond by using cash for larger purchases.

GTRI has specifically identified this possibility, but it is not yet known whether the new rules will result in a measurable increase in cash usage after implementation.

India's widespread UPI adoption, convenience of QR payments and growing digital-payment infrastructure are also factors that could influence consumer behaviour.

UPI's Scale Makes the Policy Significant

The potential impact of the MDR debate is significant because UPI has become deeply integrated into India's retail economy.

Reuters reported that UPI accounted for about 84% of India's digital payment volume and approximately 49% of global real-time payment volumes, based on government data.

UPI is used by consumers ranging from urban digital users to small retailers, street vendors and service providers.

Consequently, even a relatively small change in transaction economics can have implications across a very large payment network.

Merchants Raise Concerns Over the Timing

The new MDR is scheduled to begin shortly before India's major festive shopping period.

Retail groups have expressed concerns that additional payment costs could be difficult for businesses operating on thin margins.

Some retailer organisations have argued that the monthly exemption threshold for small merchants may not adequately cover businesses that experience seasonal increases in sales.

Industry responses therefore remain an important factor to monitor as implementation approaches.

Government Position: No Rollback

The debate has also led to calls for reconsideration of the new MDR framework.

However, a senior government official has said there is no question of a rollback of the 0.4% MDR on eligible UPI transactions above Rs 2,000.

The government has stressed that the charge is paid within the merchant-side payments ecosystem and that consumers will continue to have access to free UPI transactions under the specified categories.

What Changes From October 15, 2026?

The key changes can be summarised as follows:

UPI Payment TypeTreatment From October 15Person-to-person transfersFreeEligible P2M up to Rs 2,000No 0.4% MDREligible P2M above Rs 2,0000.4% MDREligible transaction of Rs 75,000 or moreRs 300 MDR capEligible small merchants within thresholdMDR exemptionSelected essential categoriesRs 5 concessional MDRCapital-market transactions0.02%, capped at Rs 300

The framework contains additional category-specific provisions, so merchants and payment providers will need to check the applicable classification.

UPI MDR: Potential Benefits and Concerns

The new system presents different considerations for different participants.

Potential benefits include:

• Creating a revenue stream for the payments ecosystem

• Supporting continued investment in UPI infrastructure

• Helping fund cybersecurity and fraud-prevention systems

• Providing greater commercial sustainability for payment participants

• Retaining free UPI access for consumers in several categories

Potential concerns include:

• Higher operating costs for eligible merchants

• Pressure on businesses with thin margins

• Possible changes in merchant payment preferences

• Potential reduction in digital-payment usage for some high-value transactions

• Possible movement towards cash among some price-sensitive users

The eventual outcome will depend on how the ecosystem adapts to the new framework.

Bottom Line

The introduction of a 0.4% MDR on eligible UPI merchant transactions above Rs 2,000 has opened a debate over the future economics of India's digital payments ecosystem.

GTRI has warned that the additional cost could encourage some small merchants and price-sensitive consumers to return to cash. The government, meanwhile, has defended the framework as a way to strengthen the financial sustainability of UPI and has ruled out a rollback.

For consumers, UPI remains free for person-to-person transfers and eligible transactions up to Rs 2,000, while qualifying small merchants will also receive an exemption. The new MDR framework is scheduled to take effect on October 15, 2026.

Whether the policy results in greater cash usage, changes in merchant pricing or simply becomes another operating cost for businesses will become clearer after implementation and as payment behaviour adjusts.

Disclaimer: This article is for informational purposes only. Statements attributed to GTRI represent the organisation's analysis and views and should not be treated as established outcomes. UPI MDR rules and implementation details may be subject to regulatory clarification or change.