UPI Fee Burden Won’t Fall on Consumers, Govt Plans to Track Merchants: Report

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

However, the government has clarified that UPI users will not be required to pay the MDR. The fee will apply to eligible merchants, while banks have been advised to ensure that merchants do not pass the cost directly on to consumers.

Government to monitor merchants from October 15

According to government officials cited by The Indian Express, authorities will monitor transactions from October 15 to check whether merchants are attempting to pass the MDR burden on to customers.

The monitoring will reportedly be carried out on a daily basis, with comparisons against previous-year data. The government is also working with payment aggregators and platforms that onboard merchants to explain where the new MDR will apply and where it will not.

The move comes amid concerns that businesses could indirectly recover the additional payment-processing cost from customers after the new framework takes effect.

What is the new UPI MDR?

Under the revised framework, a 0.4% MDR will apply to specified UPI person-to-merchant (P2M) transactions above ₹2,000.

The charge will be capped at ₹300 per transaction, meaning the maximum standard MDR is reached on transactions of ₹75,000 or more. The fee is not a government tax; it is distributed among participants in the digital-payment ecosystem, including banks, payment service providers and UPI application providers.

For example, on an eligible ₹10,000 merchant payment, the 0.4% MDR would amount to ₹40. On a ₹50,000 payment, it would be ₹200, while transactions of ₹75,000 or more would face the ₹300 cap.

UPI payments up to ₹2,000 will remain free

The revised framework does not mean that all UPI payments will become chargeable.

Payments made to merchants up to ₹2,000 will continue to remain free. Person-to-person (P2P) UPI transfers will also remain completely free, irrespective of the amount transferred.

The government has said approximately 96% of merchant transactions will remain unaffected because they either fall below the ₹2,000 threshold or are covered by the zero-MDR framework for small merchants.

Small merchants protected under new framework

Small businesses are also covered by a separate exemption.

Merchants receiving up to ₹1 lakh per month through UPI QR codes under the P2PM category will continue to receive zero-MDR treatment. The provision is intended to protect street vendors, neighbourhood shops and other small businesses from additional digital-payment costs.

Special rates for essential services

The framework also provides different MDR rates for certain categories.

Payments above ₹2,000 in specified essential and thin-margin sectors, including railways, telecommunications, insurance, fuel and agricultural inputs, will attract a flat ₹5 MDR.

Certain capital-market transactions, including payments involving mutual funds, securities, stockbrokers and dealers, will attract a lower 0.02% MDR, capped at ₹300.

Can merchants charge customers separately?

The government has made its position clear: MDR is a merchant-side charge and should not be passed on to consumers.

Banks have been advised to ensure merchants do not transfer the cost to customers, while UPI application providers have been prohibited from imposing platform fees or hidden charges on users.

The government's decision to monitor merchants reflects concerns over how the new cost could affect customers once the revised framework becomes operational.

Why is UPI introducing MDR now?

The revised framework comes after years of a zero-MDR regime for UPI. Government officials have argued that completely subsidising the payment system is not necessarily sufficient to support continued investment and innovation in the ecosystem.

Under the new system, revenue generated from eligible merchant transactions will be shared among payment ecosystem participants. The government has also announced a dedicated fund for promoting UPI adoption among small merchants, with an amount equivalent to 5% of total MDR collections earmarked for the fund.

What does the new rule mean for ordinary UPI users?

For most everyday users, the immediate impact is expected to be limited.

P2P transfers remain free, merchant payments up to ₹2,000 remain free, and eligible small merchants continue to receive zero-MDR treatment. For specified larger merchant payments, the MDR will be borne by the merchant rather than being charged separately to the customer.

The government's planned monitoring from October 15 will now be important in determining whether merchants follow the rule and keep the MDR burden away from consumers.