MDR Returns to UPI: What Has Changed and What It Means for India

Introduction

India’s digital payments ecosystem is entering a new phase.

From 15 October 2026, a structured Merchant Discount Rate (MDR) will apply to certain UPI merchant transactions.

This marks a significant change after several years in which UPI merchant payments operated without MDR.

What is MDR?

Merchant Discount Rate is the fee associated with processing a digital payment.

It is generally borne by the merchant, with the fee distributed among participants in the payment ecosystem such as acquiring banks, issuing banks and payment service providers.

Historically, MDR has been used for card payments.

In January 2020, MDR was effectively removed for UPI and RuPay debit-card transactions to accelerate digital-payment adoption.

RBI has previously highlighted the trade-off: very low payment costs encourage adoption, but payment infrastructure also needs sustainable economics.

What changes from October 15, 2026?

Under the new framework,

P2M(Peer-to-Merchant) UPI transactions above ₹2,000 will attract an MDR of 0.4%, subject to a maximum charge of ₹300 for transactions above ₹75,000.

Importantly, this is a merchant-side charge rather than a fee directly imposed on consumers.

Several safeguards remain:

• P2P(Peer-to-Peer) transactions remain completely free, regardless of transaction value.
• UPI payments to merchants of ₹2,000 or less remain free.
• Eligible small merchants receiving up to ₹1 lakh per month through UPI QR codes continue to receive zero-MDR treatment.
• Certain sectors receive special treatment, including a ₹5 MDR for specified higher-value payments.
• Capital-market related payments have a much lower 0.02% MDR, capped at ₹300.

The government estimates that approximately 96% of P2M transactions will remain unaffected.

Why is MDR returning?

The central issue is sustainability.

UPI has grown into critical national digital infrastructure, requiring substantial expenditure on technology, cybersecurity, fraud prevention, processing and network infrastructure.

The new model attempts to create a revenue stream for the ecosystem while retaining free access for consumers and small merchants.

The change also reflects a broader evolution: UPI is moving from a growth-first, zero-cost model toward one where higher-value commercial transactions contribute toward the cost of operating the payment ecosystem.

What should businesses watch?

For larger merchants, payment costs will become another operating expense.

Businesses may therefore reassess payment-channel economics, settlement arrangements and pricing. However, whether the cost is ultimately absorbed by merchants or indirectly reflected in prices will depend on competitive conditions.

For consumers, the immediate message is straightforward: UPI itself does not become a paid service. The important distinction is between a consumer using UPI and a merchant accepting a qualifying high-value UPI payment.

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