Sunita Somvanshi
If you send money through UPI to a friend or family member, the new MDR framework does not apply to that transfer. If you pay a merchant — a shop, a restaurant, a service provider — for amounts above ₹2,000, here is what changes from October 15.
The Short Answer First
Customers are not meant to pay the 0.4% charge directly. The Ministry of Finance has been explicit: UPI MDR above ₹2,000 is a charge within the payment processing ecosystem, directed at merchants and payment providers, and the government has stated it should not be passed to consumers. Person-to-person transfers remain free regardless of amount.
What the New Framework Actually Does
India’s National Payments Corporation has set a 0.4% merchant discount rate (MDR) for UPI payments above ₹2,000 at specified merchants, effective October 15, 2026. The standard rate is 0.4%, with a ₹300 cap for transactions of ₹75,000 or more. Certain sectors attract a flat ₹5 fee instead of the percentage rate.
The new UPI framework does not mean every user will pay a fee on payments above ₹2,000. P2P transfers remain free regardless of amount, while specified merchant transactions above ₹2,000 attract MDR within the payment ecosystem. The government says consumers should not bear the MDR, and approximately 96% of P2M transactions remain unaffected under the framework.
MDR Is Not a Tax — Two Important Clarifications
The Ministry of Finance has made two corrections to common mischaracterisations of this change:
First: MDR is not a government tax. It does not flow to the government or to NPCI. It is a charge within the payment processing system — a fee between payment service providers, similar in concept to how credit card processing fees work between banks, merchants and card networks.
Second: Consumers are not meant to pay it. The government has directed that MDR should not be transferred to customers. If a merchant adds a surcharge to a UPI payment above ₹2,000 and attributes it to MDR, that is not what the framework intends.
Customers who encounter unexpected charges on UPI transactions above ₹2,000 should query them directly with the merchant.
The Difference Between P2P and P2M
UPI transactions fall into two categories that matter here.
Person-to-person (P2P) transfers — sending money to a friend, family member, or anyone using their UPI ID — remain completely free at any amount. The new MDR does not apply to P2P regardless of size.
Person-to-merchant (P2M) payments — paying a business through UPI — are where the MDR applies, but only above ₹2,000 and only at specified merchants. Small merchants covered by the zero-MDR category remain exempt.
The Ministry of Finance says approximately 96% of P2M transactions remain unaffected. That figure puts the scope of the change in perspective: the MDR applies to a specific slice of high-value merchant payments, not to the everyday UPI transactions most users make most of the time.
What the 0.4% Rate Means in Practice
For a ₹5,000 merchant payment, 0.4% MDR is ₹20 — a charge that flows within the payment ecosystem between the acquiring bank and the payment service providers. For transactions at or above ₹75,000, MDR is capped at ₹300.
This is the point where confusion is most likely. The 0.4% rate is on the merchant side of the transaction, not the consumer side. The stated framework does not describe MDR as an additional UPI fee charged to the customer; customers should check the displayed amount and report any unexplained surcharge.
Karmactive’s earlier UPI article covering the gazette notification is being updated to reflect the September 15 Ministry of Finance framework, which clarifies several points that were not confirmed in the original gazette.
Who Is Affected — Merchants, Not Customers
The practical change falls on payment service providers and merchants. Payment apps and banking platforms will need to adjust their systems before October 15. The MDR is charged within the merchant-payment ecosystem and is distributed among participating payment-system entities; the government says customers will not pay it. Consumers — in the government’s framework — should not notice a direct cost change.
FAQ
Will customers be charged for UPI payments above ₹2,000? Customers are not meant to pay MDR directly. The 0.4% charge applies within the payment processing ecosystem. The Ministry of Finance has directed that MDR should not be transferred to consumers. Person-to-person UPI transfers remain free at any amount.
What is UPI MDR? Merchant discount rate (MDR) is a processing fee within the UPI payment system. For specified merchant transactions above ₹2,000, the rate is 0.4% from October 15, 2026. The charge flows between payment service providers — it is not a government tax and is not directed at consumers.
Who pays the 0.4% UPI MDR? The MDR sits within the merchant payment ecosystem. It is not meant to be borne by customers. The exact allocation among merchants and payment service providers depends on their contractual arrangements and the applicable NPCI circular.
Does UPI MDR apply to P2P transfers? No. Person-to-person UPI transfers remain free regardless of the amount. MDR only applies to specified person-to-merchant (P2M) transactions above ₹2,000.
When does the new UPI charge start? The 0.4% MDR on specified merchant UPI payments above ₹2,000 takes effect from October 15, 2026.
What is the maximum UPI MDR? MDR is capped at ₹300 for transactions of ₹75,000 or more. Below that threshold, MDR is 0.4% of the transaction value. Certain sectors attract a flat ₹5 fee instead.
