The Government of India is working on measures to ensure that the new Merchant Discount Rate introduced for selected UPI transactions is not passed on to consumers. The issue has gained attention ahead of the October 15, 2026 implementation of the revised UPI payment framework, under which specified person to merchant transactions above Rs 2,000 will attract a Merchant Discount Rate of 0.4 percent.
According to reports citing senior Finance Ministry officials, the government is considering a mechanism to monitor the implementation of the new MDR and prevent merchants from transferring the payment processing cost to customers. The Centre is also expected to work with banks, payment aggregators and other participants in the UPI ecosystem to address possible enforcement gaps.
The proposed monitoring comes after concerns emerged over whether merchants might add the MDR to customers' bills once the new framework becomes operational. The government's stated position is that the MDR is a merchant side payment ecosystem charge and should not become an additional fee for consumers making UPI payments.
Finance Minister Nirmala Sitharaman has separately clarified that the MDR is not a tax, cess or surcharge. She said the collections will not go to the Government of India and will instead remain within the digital payments ecosystem to support the infrastructure and services involved in processing UPI transactions.
Under the revised framework, a 0.4 percent MDR will apply to specified person to merchant UPI transactions above Rs 2,000 from October 15. For transactions of Rs 75,000 or more, the standard MDR will be capped at Rs 300 per transaction. The charge is therefore designed to apply only to specified higher value merchant payments rather than to all UPI transactions.
For example, if an eligible customer makes a UPI payment of Rs 10,000 to a merchant, the applicable MDR at 0.4 percent would be Rs 40. However, the government has made it clear that this amount should not be added to the customer's payment as a separate UPI charge. The MDR is intended to be handled within the merchant payment ecosystem.
The distinction between person to person and person to merchant transactions is important. Person to person UPI transfers will continue to remain free regardless of the amount transferred. Therefore, sending money to a family member, friend or another individual will not attract the new MDR simply because the transaction is above Rs 2,000.
Merchant payments up to Rs 2,000 will also remain free of MDR. This means customers making smaller purchases through UPI will not face the new merchant side charge. The Finance Ministry has said that approximately 96 percent of merchant UPI transactions will remain unaffected by the new framework.
The government has also retained a zero MDR provision for eligible small merchants. Small merchants receiving up to Rs 1 lakh per month through UPI QR codes under the specified category will continue to receive zero MDR. This provision is intended to protect street vendors, neighbourhood shops and other small businesses from additional payment processing costs.
The new MDR framework is therefore targeted primarily at selected higher value merchant transactions. The government has described the measure as part of efforts to support the long term sustainability of the UPI ecosystem while keeping everyday digital payments accessible to individuals and small businesses.
The issue of whether merchants can pass the charge to customers has nevertheless become an important part of the implementation process. Reports citing government sources said the Finance Ministry has already engaged with payment aggregators and is considering ways to close enforcement gaps. The Indian Banks' Association is also expected to play a role in creating awareness and communicating the rules to banks and merchants.
The government is also expected to monitor the rollout after October 15. The objective is to ensure that the official structure of the MDR is followed and that customers are not presented with an additional UPI transaction fee by merchants.
The monitoring mechanism is particularly relevant because MDR is different from a customer transaction fee. Merchant Discount Rate is generally a payment processing cost associated with accepting digital payments. Under the new UPI framework, it is distributed among participants in the payment ecosystem, including banks, payment service providers and UPI application providers.
The Finance Ministry has also clarified that the MDR is not money being collected by the government. Sitharaman said the collections would not accrue to the Consolidated Fund of India. Instead, the charge is intended to support technology infrastructure, innovation and other costs associated with maintaining and expanding digital payments.
The new framework also contains different rates for certain categories. Specified essential and thin margin sectors, including railways, telecommunications, insurance, fuel and agricultural inputs, will have a flat MDR of Rs 5 for transactions above Rs 2,000. Capital market related transactions involving areas such as mutual funds and securities will have a separate lower MDR structure.
These differentiated provisions mean that not every UPI merchant transaction above Rs 2,000 will necessarily be charged in exactly the same way. The applicable MDR depends on the transaction category and the merchant's eligibility under the framework.
For consumers, the government's latest clarification means that there is no general UPI fee being introduced for ordinary users. Customers will continue to be able to use UPI for person to person payments without a transaction charge. Merchant payments up to Rs 2,000 will also remain outside the MDR framework, while eligible small merchants will continue to receive zero MDR.
The change is more relevant to businesses accepting higher value UPI payments. Merchants covered by the new framework will have to account for the applicable payment processing cost. However, according to the government's stated position, that cost should not be directly transferred to the customer as a UPI surcharge.
The distinction is important for consumers because any separate amount added to a bill may not necessarily represent an officially imposed UPI customer fee. The government's position is that merchants should not pass the MDR on to customers. Banks and payment ecosystem participants are expected to help ensure compliance with this requirement.
The introduction of MDR also comes against the background of UPI's rapid growth in India. The payment system has become a major part of everyday transactions, from small retail purchases to larger payments. The government therefore wants to introduce a mechanism that supports the financial sustainability of the digital payment infrastructure without reducing accessibility for ordinary users.
According to the Finance Ministry, the new framework is expected to leave the majority of merchant transactions unaffected. The government estimates that MDR will apply to only around 4 percent of merchant transactions, meaning approximately 96 percent will remain outside the charge because they are either below the Rs 2,000 threshold or covered by the zero MDR provisions.
The upcoming implementation will therefore be closely watched by merchants, banks, payment applications and consumers. The effectiveness of the new system will depend not only on the MDR rates but also on how clearly the rules are communicated and how consistently they are enforced.
For consumers, the main point is that the new MDR is not intended to become a direct UPI transaction fee. Finance Ministry officials and the Finance Minister have repeatedly stated that consumers should not bear the charge. The proposed monitoring and awareness measures are intended to reinforce that position as the October 15 rollout approaches.
At the same time, the actual implementation will depend on the behaviour of merchants and the monitoring mechanisms adopted by banks and payment ecosystem participants. Government sources have indicated that steps will be taken to address enforcement gaps and prevent the additional payment processing cost from being passed on to customers.
The October 15 change therefore represents a targeted modification to the economics of UPI merchant payments rather than a general charge on UPI users. Person to person payments will remain free, smaller merchant transactions will remain free, and eligible small merchants will continue under the zero MDR framework.
As the implementation date approaches, the focus will remain on how banks, payment aggregators and merchants apply the new rules. The government's proposed monitoring mechanism is intended to ensure that the MDR remains a merchant payment ecosystem charge and does not become an additional cost for consumers using UPI.
