Why has govt added 0.4% MDR on merchant UPI payments above Rs 2,000?

The government on Wednesday clarified why it has introduced a Merchant Discount Rate (MDR) on select UPI merchant transactions, mentioning the move is aimed at making India's digital payments ecosystem financially sustainable as transaction volumes continue to surge.

Under the new framework, a 0.4% MDR will apply to Person-to-Merchant (P2M) UPI transactions above Rs 2,000, with the fee capped at Rs 300 for transactions of Rs 75,000 and above. The new framework will take effect from October 15, 2026.

The key point highlighted by the Finance Ministry is that the new charge is not for consumers. UPI payments will continue to remain free for customers, while the MDR will be borne by eligible merchants.

In a post explaining the new framework, the Ministry said UPI had processed 24.5 billion transactions in August 2026 alone and argued that a small fee on high-value merchant transactions was needed to help fund the infrastructure behind the system.

"To keep this system self-sustainable, a small fee on high-value merchant transactions helps fund better infrastructure and cybersecurity, support for small merchants in Tier III-VI towns and rural areas, and awareness and incentives to expand UPI adoption," the Ministry said.WHY THE GOVERNMENT SAYS UPI NEEDS A NEW FUNDING MODEL

The government's primary argument is that the cost of running UPI has grown along with its scale.

The Finance Ministry's FAQ says UPI now processes billions of transactions every month. Supporting that volume requires investment in server infrastructure, telecommunications networks, fraud prevention systems, cybersecurity monitoring and banking technology.

The government says industry estimates put the annual cost of maintaining UPI payment operations, server bandwidth, fraud prevention systems and bank technical support at around Rs 20,000 crore.

This is one of the central arguments behind the new MDR framework.

For years, government incentives and subsidies have helped support the economics of digital payments. But the Finance Ministry says these were intended to encourage adoption rather than permanently compensate the payment industry for its operating costs.

"Annual government incentive/subsidy, while helpful in accelerating early digital adoption, were designed as short-term bridge funding rather than a permanent measure to compensate the cost incurred by the payment industry," the FAQ said.

The government says continuing to rely entirely on annual budget allocations creates uncertainty for banks and fintech companies and can limit their ability to make long-term technology investments.

Its proposed solution is a threshold-based commercial model in which higher-value merchant transactions contribute towards the cost of maintaining the ecosystem.

"The transition to a commercial, threshold-based model provides reliable capital for continuous technological innovation," the Ministry said.WHY NOT CHARGE EVERY UPI TRANSACTION?

The government has specifically designed the framework to keep the vast majority of UPI transactions outside the MDR net.

The 0.4% charge applies only to P2M transactions above Rs 2,000. According to the Finance Ministry, transactions up to Rs 2,000 account for more than 95% of the total volume of UPI merchant transactions.

That means everyday payments, the kind typically made at shops, restaurants, local vendors and other businesses — remain outside the MDR framework if they are below the threshold.

The Ministry says the objective is to balance two competing requirements: keeping UPI affordable for everyday payments while creating a sustainable source of funding for the payment infrastructure.

The distinction is important because UPI's popularity has been built partly on the fact that it is cheap and convenient for both consumers and merchants.

The government says it does not want the introduction of MDR to change that for low-value transactions.WHAT HAPPENS TO SMALL MERCHANTS?

The government has also created an exemption for micro merchants.

Small merchants operating under the P2PM framework and receiving up to Rs 1 lakh a month through UPI QR codes will continue to enjoy zero MDR.

The Finance Ministry says the P2PM category is designed to protect small vendors and the unorganised retail sector from commercial payment fees.

Importantly, the government says a small merchant will not suddenly become liable for MDR merely because an individual customer makes a payment above Rs 2,000.

The applicability of MDR will depend on the merchant's account categorisation.

The framework also provides for a dedicated fund for small merchants.

The Ministry says the fund will support digital payment infrastructure in Tier III to Tier VI centres, including the northeastern states, Jammu and Kashmir and Ladakh. It will also provide financial assistance for merchant onboarding and incentives to encourage UPI transactions among small merchants.

The detailed framework for this fund is expected to be finalised in consultation with the Reserve Bank of India within three months.

So, the government's stated model is not simply to collect MDR from merchants. It also wants part of the ecosystem's revenue to support further digital payment adoption among smaller businesses and in areas where digital infrastructure needs to expand.WHERE WILL THE MDR MONEY GO?

According to the Finance Ministry, MDR will remain within the UPI ecosystem.

The FAQ says the money will support infrastructure resilience, innovation, cybersecurity and customer service.

Cybersecurity is particularly important in the government's explanation.

As UPI processes an increasingly large number of transactions, the Ministry says revenue from MDR can be used for investments in cybersecurity infrastructure, AI-driven fraud detection and encryption upgrades.

The government is therefore presenting MDR as a way to generate a recurring pool of money that can be invested back into the payment network rather than depending entirely on government support.HOW MUCH WILL MERCHANTS PAY?

The MDR has been structured around transaction value.

A Rs 3,000 UPI payment will attract an MDR of Rs 12 at 0.4%.

For a Rs 50,000 transaction, the charge will be Rs 200.

For a transaction of Rs 75,000 or more, the MDR is capped at Rs 300. Therefore, even though 0.4% of Rs 1 lakh would work out to Rs 400, the merchant will pay only Rs 300.

The government says the rate remains lower than charges associated with traditional card payments.

Its FAQ states that standard credit card MDRs typically range between 1.5% and 2.5%, while debit card MDRs can go up to 0.90%. The government says the 0.4% UPI rate has therefore been kept substantially lower.advertisementSOME SECTORS WILL PAY A FLAT RS 5The government has also carved out certain sectors from the standard 0.4% structure.

For categories including railways, telecom, insurance and fuel, a flat MDR of Rs 5 will apply to transactions above Rs 2,000.

The Ministry says this is intended to prevent payment costs from rising significantly for essential services and sectors such as fuel retail, where margins can be relatively thin.

Capital market transactions will have an even lower rate.

Payments involving mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02%, subject to a maximum cap of Rs 300.CONSUMERS WILL NOT PAY MDR

For ordinary UPI users, the government says nothing changes.

Person-to-person transfers will remain free, irrespective of the amount transferred. Consumers will also not be charged a fee for making routine UPI payments.

The Ministry's FAQ explicitly states that UPI services will continue without cost to consumers and that there will be no charges for P2P transfers.

UPI apps will also not be allowed to impose a separate platform fee on UPI payments.

The government has further said that merchants cannot pass the MDR on to buyers. In other words, the customer is expected to pay the listed price, while the payment processing cost is borne by the merchant.WHY THE GOVERNMENT THINKS MDR COULD HELP COMPETITION

The Ministry has also linked MDR to competition among payment companies.

Its argument is that a completely zero-MDR environment can favour large, well-capitalised companies that can afford to sustain payment operations despite limited direct revenue from transactions.

A predictable commercial revenue model, the government says, could make it easier for smaller fintech and technology companies to enter the sector and compete.

"Establishing a sustainable commercial framework encourages new fintech startups and technology companies to enter the digital payments space," the FAQ says.

The government expects this to eventually translate into greater competition, better services and more choice for consumers.- EndsPublished By: Sonu VivekPublished On: Sep 16, 2026 16:07 IST