India is preparing for a new Merchant Discount Rate framework for selected Unified Payments Interface transactions, with the government examining measures to ensure that merchants do not transfer the additional payment cost to consumers. The proposed changes are scheduled to come into effect from October 15, 2026, and are intended to create a sustainable revenue structure for the digital payments ecosystem while keeping most UPI transactions free.
According to government sources, discussions have been held with payment aggregators and other participants in the UPI ecosystem to address possible enforcement gaps. The government is considering mechanisms to monitor how the new MDR framework is implemented and to ensure that merchants do not recover the merchant-side payment charge directly from customers.
Under the revised framework, a 0.4 percent Merchant Discount Rate will apply to specified person-to-merchant UPI transactions above Rs 2,000. The MDR will be capped at Rs 300 for transactions of Rs 75,000 and above. The charge is designed as a merchant-side fee within the payments ecosystem rather than a direct charge imposed on consumers.
The Ministry of Finance has clarified that person-to-person UPI transactions will remain completely free, regardless of the amount transferred. Payments made to merchants up to Rs 2,000 will also remain free. In addition, eligible small merchants receiving up to Rs 1 lakh per month through UPI QR codes will continue under the zero-MDR framework. The government estimates that around 96 percent of merchant transactions will remain unaffected by the new framework.
The government has also stated that customers should not be charged separately for MDR. Banks have been advised to ensure that merchants do not pass the MDR cost on to customers, while UPI application providers have been prohibited from imposing platform fees or hidden charges linked to the revised framework. The proposed monitoring mechanism is intended to strengthen compliance once the new rules become operational.
The introduction of MDR marks a change from the existing zero-MDR structure for many UPI merchant payments. The government has said the framework is aimed at supporting the long-term sustainability of the UPI ecosystem. MDR collections will be distributed among participants in the payments ecosystem, including banks, payment service providers and UPI application providers.
The government has also announced measures intended to protect smaller businesses. A dedicated fund is expected to receive an amount equivalent to 5 percent of total MDR collections to support UPI adoption among small merchants and encourage continued digital payment usage.
Certain sectors will have different MDR arrangements. Payments above Rs 2,000 involving specified essential services such as railways, telecommunications, insurance and fuel will attract a flat Rs 5 charge. Capital market-related transactions, including certain mutual fund and securities payments, will have a lower MDR of 0.02 percent, subject to a cap of Rs 300.
The government is also monitoring concerns that the introduction of MDR could encourage some consumers or merchants to shift toward cash payments. Officials have indicated that they do not expect a significant decline in UPI usage because only a small portion of overall merchant transactions will be covered by the new charge. Moneycontrol reported that the government estimates only about 4 percent of total UPI transaction volume will be covered by the MDR framework.
The proposed rules have nevertheless generated concerns among sections of the trading community. Some trade representatives have argued that businesses operating on narrow margins may find it difficult to absorb an additional payment cost and could potentially adjust prices or encourage alternative payment methods. These concerns remain part of the wider debate around the implementation of MDR and its possible effect on consumer behaviour.
The government has also rejected claims that the MDR framework would introduce a separate GST charge on UPI users. According to government sources, GST applicable to MDR payments would be subject to input tax credit for eligible businesses. Officials have described reports of a separate GST burden on consumers as incorrect.
For consumers, the key point is that the new framework does not mean that every UPI payment will attract a fee. Person-to-person transfers will remain free, merchant payments up to Rs 2,000 will remain free, and eligible small merchants will continue under the zero-MDR structure. The proposed MDR will apply only to specified higher-value merchant transactions.
The October 15 rollout will therefore be closely watched by banks, payment companies, merchants and consumers. The effectiveness of the new framework will depend not only on how MDR is collected but also on how effectively the government and financial institutions monitor compliance and prevent the merchant-side charge from becoming an additional cost for customers.