For many years, using UPI to make payments has been similar to using cash. Can a QR code, enter the amount, and pay without worrying about any additional fees. However, starting on October 15, certain Person-to-Merchant (P2M) transactions above Rs 2000 would be subject to a 0.4% Merchant Discount Rate (MDR).
The MDR will remain nil for payments up to Rs 2000. The MDR would be limited to 300 rupees for transactions totalling 75000 or more. No matter the amount, person-to-person payments will continue to be free.
Why change to MDR right now?
In order to speed up the adoption of digital payments, the government eliminated merchant fees on UPI and RuPay debit card transactions in January 2020. Instead, banks and fintechs were compensated through an annual budgeted incentive program. This step terminates the zero MDR regime.
Since then, UPI has expanded well beyond mm the original plan.
In August 2026, the network handled 2451 crore transactions totaling rupees 29.9 lakh crore.
At that scale, maintaining the system’s dependability, security, and capacity to manage ever-increasing volumes has also become more expensive.
According to NPCI industry estimates place the early cost of running UPI is about Rs 20,000 crore. It includes servers, bandwidth, fraud detection, and Bank technical support.
The Standing Committee on Finance of Parliament was informed separately by the Department of Financial Services that the payments sector spends around Rs 20,700 crore a year on P2M transactions alone.
The lack of an MDR was making it difficult for UPI to remain financially viable. It is according to the March report from the parliamentary committee.
In contrast, the government’s actual subsidy expenditure to reimburse banks for offering UPI and RuPay payments without merchant fees has been a small portion of the projected cost.
In FY2023-24, the largest budgetary expenditure was rupees 3,631 crore.
Although the final compensation was increased to almost Rs 2196 crore, the budget estimate for FY2025-2026 was just Rs 437 Crore.
The budget for FY2026-2027 is Rs 2000 crore.
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