NPCI Introduces MDR on High-Value Merchant UPI Transactions

The National Payments Corporation of India (NPCI) has introduced a 0.4% Merchant Discount Rate (MDR) framework for eligible Person-to-Merchant (P2M) UPI transactions above ₹2,000, effective from 15th October 2026.

About Merchant Discount Rate (MDR)

  • MDR is a fee paid by merchants to banks and payment service providers for processing digital transactions.
  • The fee is shared among participants in the payment ecosystem, including banks and payment service providers.

Key Features of the Framework

  • Exempted Transactions:
  • Person-to-Person (P2P) transactions
  • Transactions involving small vendors
  • P2M UPI transactions up to ₹2,000 (including RuPay debit card payments)
  • Small Merchant Protection: Small merchants receiving up to ₹1 lakh per month through UPI QR codes (P2PM category) remain exempt from MDR on all UPI transactions.
  • Sector-Specific Charges: Sectors such as railways, telecom, insurance, fuel and agricultural inputs will attract a flat MDR of ₹5 per transaction for payments above ₹2,000. For transactions of ₹75,000 and above, MDR is capped at ₹300 per transaction.
  • Special Category Charges: Payments related to mutual funds, securities, stock brokers and dealers attract a reduced MDR of 0.02%, capped at ₹300, to encourage participation in formal financial markets.
  • Impact: Per the Ministry of Finance, only around 4% of merchant transactions will be affected, as most fall below ₹2,000 or qualify for exemptions.
  • Banks have been advised to ensure merchants do not pass MDR costs to customers.
  • Support for Small Businesses: A dedicated fund using 5% of MDR collections will promote UPI adoption among small merchants and strengthen digital payment inclusion.

Significance

  • Makes the UPI ecosystem self-sustainable after years of zero-cost operation.
  • Supports expansion of digital payments in rural and semi-urban areas.
  • Maintains competitiveness while keeping most UPI transactions free.

Background

  • UPI, launched in 2016 and operated by NPCI (a not-for-profit entity under RBI and IBAs), has become the backbone of India's digital payment ecosystem.
  • Zero-MDR on UPI (mandated since 2019-20) raised sustainability concerns for banks and payment service providers, prompting this calibrated MDR framework.

Related Institutional Context

  • NPCI: Established in 2008 under the guidance of RBI and the Indian Banks' Association (IBA); operates UPI, RuPay, IMPS, AePS, etc.
  • Relevant to GS Paper 3: Mobilization of Resources, digital economy, and financial inclusion.