UPI MDR 2026: What the New Fee Structure Means for Indian Merchants

Key Takeaways

• New MDR from 15 October 2026 for specified merchant UPI payments.
• 0.4% MDR applies to eligible P2M transactions above ₹2,000.
• ₹300 cap applies to eligible transactions of ₹75,000 and above.

UPI has long been associated with fast, convenient and low cost digital payments in India. From 15 October 2026, the payment landscape will change for some merchant transactions. A new MDR will apply to eligible UPI payments above ₹2,000.

Consider a retailer receiving a ₹5,000 payment through UPI. The customer will not see an additional charge at checkout. The merchant may have to pay ₹20 in MDR if the transaction falls under the standard eligible category. At ₹1 lakh, the MDR is capped at ₹300.

So, what exactly has changed, who pays the fee, and which merchants are affected?

This guide breaks down the 2026 UPI MDR rules. It explains the key calculations and thresholds. It also shows what the new structure could mean for Indian merchants and their payment costs.

What Changed in UPI MDR in 2026?

The key change is the introduction of MDR on specified Person to Merchant (P2M) UPI transactions above ₹2,000. Under the standard category:

• Transactions up to and including ₹2,000: No MDR
• Above ₹2,000 and below ₹75,000: 0.4% MDR
• ₹75,000 and above: ₹300 maximum MDR per transaction

The framework takes effect from 15 October 2026. However, this is not a blanket charge on all UPI payments. P2P payments are treated differently. Eligible small merchants and certain special categories also follow separate rules.

When Does the New UPI MDR Take Effect?

The revised MDR framework comes into effect on 15 October 2026. This gives merchants time to review their UPI payment volumes and transaction values. They can also check their merchant classification before the new structure takes effect.

The date matters to merchants. They should use the new MDR rates only for transactions processed after the framework takes effect. Transactions processed before that date will follow the earlier rules.

What Is MDR?

MDR stands for Merchant Discount Rate. It is a fee associated with processing a merchant payment through a digital payment network. The fee is distributed among relevant participants in the payment ecosystem.

Under the new UPI framework, MDR applies to specified merchant transactions. It is not a general fee charged to every UPI user.

The key distinction is that MDR is a merchant payment charge within the payment ecosystem. It is not a convenience fee added to every UPI transaction for customers.

Who Pays UPI MDR?

The MDR is borne by the eligible merchant. For example, suppose a customer buys products worth ₹5,000 from a merchant and pays through UPI.

At 0.4%: ₹5,000 × 0.4% = ₹20

The ₹20 is the MDR applicable to that eligible transaction. The customer does not receive a separate ₹20 UPI charge under the framework.

P2P vs P2M: Why the Difference Matters

Let's understand the difference between P2P and P2M is essential.

P2P: Person to Person

A P2P transaction happens between two individuals. For example: You → Your friend

A ₹10,000 transfer to a friend remains outside the new merchant MDR framework. P2P UPI transactions remain free.

P2M: Person to Merchant

A P2M transaction happens when an individual pays a business. For example: Customer → Clothing store

An eligible P2M transaction above ₹2,000 can attract the standard 0.4% MDR. This means the purpose and classification of the payment matter, not simply the amount.

How Does the ₹2,000 Threshold Work?

The ₹2,000 threshold is one of the most important parts of the new structure. For the standard eligible P2M category:

So, a merchant receiving ₹2,000 does not automatically incur the standard MDR. But a ₹3,000 eligible transaction would attract:

₹3,000 × 0.4% = ₹12

The threshold therefore creates a clear difference between lower-value and higher value eligible merchant payments.

How Is the 0.4% MDR Calculated?

Take Rohit, who runs a clothing shop and accepts eligible UPI payments from his customers. One customer buys clothes worth ₹5,000 and pays through UPI. At 0.4%, Rohit pays ₹20 as MDR. So,

₹5,000 × 0.004 = ₹20

Later, another customer makes a payment of ₹10,000. Rohit pays ₹40 as MDR on that transaction. Then,

₹10,000 × 0.004 = ₹40

If a customer makes a larger payment of ₹50,000, Rohit pays ₹200 as MDR.

₹50,000 × 0.004 = ₹200

When the transaction reaches ₹75,000, the ₹300 cap applies, so Rohit's MDR does not increase beyond ₹300 for an eligible transaction covered by the cap.

How Does the ₹300 Cap Work?

The ₹300 cap changes the calculation for larger transactions.

At ₹75,000:

• ₹75,000 × 0.4% = ₹300

At ₹1 lakh:

₹1,00,000 × 0.4% = ₹400

But because of the cap, the applicable MDR remains:

₹300

This means the effective percentage becomes lower as the transaction value increases beyond ₹75,000.

This cap is particularly relevant for businesses that regularly receive high value UPI payments.

Are There Special Categories?

Yes. Not every eligible UPI merchant transaction follows the standard 0.4% structure. Certain sectors, including railways, telecom, insurance and fuel, have a separate treatment. This with a flat ₹5 MDR for specified transactions above ₹2,000. Capital market transactions have a separate 0.02% rate, subject to the applicable cap.

This means merchants should identify their applicable category before estimating their UPI payment costs.

What About Small Merchants?

Small merchants receive separate treatment under the new UPI MDR framework. This means they do not automatically become liable for the standard 0.4% MDR simply. It is  because they receive a UPI payment above ₹2,000. The framework places eligible small merchants in the Person to Person Merchant (P2PM) category. This applies when their monthly UPI QR collections remain within the specified limit.

What does this mean for small businesses?

• The ₹2,000 threshold does not apply in isolation.
• A single payment above ₹2,000 does not automatically trigger MDR for an eligible small merchant.
• The monthly collection limit matters because the framework uses it to identify small merchants.

Example

Suppose a small neighborhood shop receives ₹80,000 through UPI QR payments in one month. One customer makes a payment of ₹5,000. Other customers make smaller payments.

The shop falls under the P2PM category. Its monthly UPI QR collections remain below the ₹1 lakh limit. Therefore, it can continue to receive eligible UPI payments without the standard 0.4% MDR. The ₹5,000 payment does not automatically attract MDR just because it exceeds ₹2,000.

Merchants should therefore look beyond the ₹2,000 transaction threshold. They should also check their merchant category and monthly UPI QR collections.

UPI MDR Examples: ₹3,000 to ₹1 Lakh

Here is the standard calculation for eligible P2M transactions:

The important point is that ₹75,000 is the point where 0.4% reaches ₹300. After that, the cap prevents the MDR from increasing beyond ₹300 per transaction.

What Should Merchants Evaluate?

The impact will not be the same for every business. Merchants should look at four things:

1. Average UPI transaction value

A business receiving mostly ₹500 to ₹2,000 payments will have a different MDR exposure. This can be from one receiving ₹20,000 to ₹50,000 payments.

2. Transaction mix

Businesses should separate:

• P2P payments
• P2M payments
• Small merchant transactions
• Special category transactions
• Standard eligible P2M transactions

3. Monthly UPI volume

A business processing a large number of eligible transactions should calculate the total MDR. It should not be looking only at the rate.

4. Reconciliation

Merchants may also need clearer visibility into the relationship between:

Payment amount → MDR → settlement amount → reconciliation

This becomes particularly important when businesses process UPI payments at scale.

What Does UPI MDR Mean for Digital Payments in India?

The introduction of MDR represents a shift in how parts of the UPI ecosystem are funded. The government has said the framework is intended to support the sustainability of the digital payment ecosystem. It is done while keeping consumer UPI payments free. Reuters reports that the new framework is expected to generate revenue for participating

• banks,
• payment apps and
• service providers while supporting infrastructure and security.

The change is therefore concentrated around selected merchant payments. It is not for only introducing a universal UPI fee. For businesses, the bigger question is not simply "Is UPI still free?" It is: "Which UPI transactions will carry a cost, and how will that cost affect my payment operations?"

FAQs

Is UPI no longer free from October 2026?

UPI remains free for consumers under the new framework. The MDR applies to specified merchant transactions.

Does MDR apply to P2P transactions?

No. P2P transactions remain outside the new merchant MDR framework.

Is 0.4% charged on every UPI transaction above ₹2,000?

No. The 0.4% rate applies to specified eligible P2M transactions. Small merchants and special categories can have different treatment.

How much MDR applies to a ₹5,000 payment?

For a standard eligible P2M transaction: ₹5,000 × 0.4% = ₹20

How much MDR applies to a ₹1 lakh payment?

For a standard eligible P2M transaction, the MDR is capped at ₹300.

When does the new MDR framework start?

The new framework takes effect on 15 October 2026.

Will customers have to pay the MDR?

The MDR is structured as a merchant side charge. The framework does not permit the MDR to be passed on to customers as a separate UPI transaction charge.