UPI MDR Explained: The New 0.4% Merchant Fee and What Changes for Shops and Fintechs
UPI MDR of 0.4% applies from 15 Oct 2026 on merchant payments above ₹2,000. Who pays, what is exempt, and what fintechs must change.
The UPI MDR rule that took effect on 15 October 2026 ends the era of completely free merchant payments for larger transactions. A 0.4% merchant discount rate now applies to certain person-to-merchant UPI payments above ₹2,000, with a cap of ₹300. Customers are not supposed to pay it, but shops, payment aggregators and fintech apps all have work to do. Details below come from secondary explainers that summarise a government FAQ and press release, so check the primary documents before changing any pricing or contracts.
What MDR means in simple words
MDR stands for merchant discount rate, the small fee a business pays to accept a digital payment. Think of it like the commission a shopping mall charges a shop for card swipes: the buyer sees the full price, and the shop receives slightly less. Until now, UPI merchant payments were largely free of this charge.
The rules in brief
According to the explainers, the Department of Financial Services published an FAQ dated 15 September 2026, with the framework issued under the Payment and Settlement Systems Act, 2007. The key points reported are:
- A 0.4% MDR applies to person-to-merchant (P2M) payments above ₹2,000, capped at ₹300 once a payment reaches ₹75,000. Worked examples: ₹3,000 costs ₹12, ₹50,000 costs ₹200 and ₹1,00,000 costs ₹300.
- A flat ₹5 applies above ₹2,000 for sectors such as railways, telecom, insurance, fuel, agricultural inputs and utilities.
- Payments to regulated capital-market entities carry 0.02%, capped at ₹300.
- Exempt: person-to-person transfers, P2M payments up to ₹2,000, and small merchants receiving up to ₹1 lakh a month through UPI QR codes. UPI AutoPay mandates reportedly carry no prescribed MDR.
The ₹2,000 figure is a fee threshold, not a limit on how much you can send by UPI.
Who pays and who earns
The merchant bears the fee through its acquiring bank. Reports say merchants may not pass it to customers and UPI apps may not add platform fees. One report, citing a reading of an NPCI circular, describes a split of 40% to the issuing bank, 30% to the acquiring bank, 20% to the UPI app and 10% to the app's partner bank. It also says 18% GST applies to the MDR, and that 5% of collections will fund small-merchant adoption. These secondary details are unconfirmed here, and one outlet notes payment aggregators have no prescribed share yet.
What fintechs and merchants should do
This list is our practical reading of the reports, not official guidance.
- Build the tiered rate table into billing and settlement systems, including the cap and sector tiers.
- Check merchant category codes so the right tier applies.
- Remove any UPI surcharge or "convenience fee" from checkout pages and invoices.
- Watch small merchants whose monthly UPI inflows cross ₹1 lakh for three straight months, since they reportedly move into the chargeable category.
- Update marketing that promises zero-cost UPI acceptance.
- Reconcile the new MDR and GST lines in settlement reports.
Open questions
A public interest petition reportedly challenges the notifications, and one report says the Supreme Court declined a stay and asked the Centre for an affidavit, so the rules could still change. The FAQ also reportedly gives no rate for education fees, and penalties for wrongly charging customers are not yet clear.
Will volumes suffer?
Probably not much in the short term, and that is a guess. UPI processed 24.07 billion transactions worth ₹29.37 lakh crore in September 2026, per NPCI data reported by StartupTalky, up about 23% in volume and 18% in value from a year earlier. Daily volumes averaged about 802 million. The September figure dipped about 1.8% from August, which the report attributes mainly to the shorter month. The next two months of data will show whether the fee changes behaviour.
Key takeaways
- From 15 October 2026, a 0.4% MDR (capped at ₹300) applies to many P2M UPI payments above ₹2,000; P2P and small payments stay free.
- Merchants bear the fee and reportedly cannot pass it on; fintechs need to update billing, category-code checks and checkout pages.
- A legal challenge and several unpublished details mean the framework may still shift, so verify against primary documents.
Sources
- [FintechSpecs: UPI MDR from 15 October 2026](https://fintechspecs.com/blog/india-upi-mdr-october-15-2026-merchant-fee-explained/)
- [Kotak Bank: New UPI rules for consumers and merchants](https://www.kotak.bank.in/en/stories-in-focus/accounts-deposits/current-account/upi-rules-for-consumers-and-merchants.html)
- [StartupTalky: UPI transactions in September 2026](https://startuptalky.com/upi-transactions-september-2026/)
Tags: UPI MDR merchant payments NPCI fintech compliance