For six years, "UPI is free — MDR is zero" was simply true for merchants. That changed on 15 September 2026, when NPCI issued a circular introducing a 0.4% Merchant Discount Rate on UPI person-to-merchant (P2M) payments above ₹2,000, effective 15 October 2026. The RBI has publicly backed the move as a step toward a "sustainable UPI ecosystem."
This piece explains the new rule in full — who actually pays it, what stays free, the sector-specific exceptions, and the older, separate charges (RuPay Credit Card on UPI, wallet interchange, aggregator fees) that were already quietly sitting outside "zero MDR" long before this update.
This is informational, not financial or compliance advice. Several implementation details — exactly which merchant categories qualify for concessional rates, how aggregation and refunds are treated — were still being finalised by NPCI/acquiring banks as of this writing. Confirm the specifics with your bank or payment aggregator before the 15 October 2026 rollout.
What MDR actually is
MDR — Merchant Discount Rate — is the fee a merchant pays their bank or payment aggregator every time a customer pays digitally. It's a percentage of the transaction value, deducted before the money is settled to the merchant's account. On a ₹3,000 sale with a 0.4% MDR, for example, the merchant receives ₹2,988; the ₹12 is split between the banks and platforms that moved the money.
The old rule: zero MDR since January 2020
Since 1 January 2020, MDR on UPI P2M transactions and on RuPay debit cards had been set to zero by government mandate, under Section 10A of the Payment and Settlement Systems Act. That mandate is what let UPI displace cards as India's default digital payment method as fast as it did — merchants paid nothing to accept it, unlike the 1–2% they'd pay on a card swipe.
To keep banks and PSPs willing to support that at zero cost to merchants, the government ran a parallel incentive scheme — a small reimbursement to acquiring banks on low-value UPI/RuPay debit volume, funded through the annual Union Budget. That money never reached merchants directly; it compensated banks, and PSPs argued for years it wasn't enough to cover their actual costs. That pressure is the direct backstory to what changed next.
The new rule: 0.4% MDR from 15 October 2026
Per NPCI's 15 September 2026 circular, from 15 October 2026:
- 0.4% MDR applies to eligible UPI P2M transactions above ₹2,000.
- It's capped at ₹300 per transaction, kicking in at the ₹75,000 mark (a ₹75,000+ transaction is charged ₹300 flat, not 0.4% of the full amount).
- Merchants bear the cost, deducted from settlement by the acquiring bank — same mechanic as MDR always worked, just no longer zero above the threshold.
- Customers pay nothing. The rule is explicit that this is a merchant-side cost, and UPI apps are separately barred from passing a platform fee on to the paying customer.
- The fee is not government revenue — it's split between the issuing bank, the acquiring bank, the PSP bank, the UPI app, and payment aggregators, framed as funding UPI's ongoing infrastructure and security costs.
- 18% GST applies on the MDR itself, not just on any aggregator fee layered on top. On a ₹3,000 sale, that's ₹12 MDR + ~₹2.16 GST on that ₹12. GST-registered merchants can claim input tax credit on it, but it will still show up as a deduction on your settlement statement.
What stays completely free
- Every UPI transaction of ₹2,000 or below, to any merchant.
- All person-to-person (P2P) transfers, at any value — this rule only touches merchant payments.
- Small merchants under the P2PM framework receiving up to ₹1 lakh a month through UPI QR straight into their bank account — zero MDR regardless of individual transaction size. This is the carve-out that protects small shopkeepers, vendors and freelancers from the new charge. If a P2PM merchant's monthly receipts cross ₹1 lakh for three consecutive months, they get reclassified as a standard P2M merchant and the 0.4% rule starts applying to their transactions above ₹2,000 going forward.
- UPI AutoPay mandates — recurring bills, subscriptions, SIPs and similar standing instructions.
- RuPay debit cards — unaffected. These remain protected by the original 2020 government notification, which this NPCI circular doesn't touch.
Sector-specific concessional rates
A few merchant categories get a flat or reduced rate instead of the standard 0.4%, reportedly including:
- Railways, telecom, insurance, fuel and utilities — a flat ₹5 per transaction above ₹2,000, rather than a percentage.
- Capital markets (mutual funds, brokers, securities) — 0.02%, capped at ₹300.
Exactly which categories qualify and how edge cases (split payments, refunds, transaction aggregation) are handled was still being clarified by NPCI at the time of writing — worth confirming directly with your acquiring bank closer to the rollout date rather than assuming.
The Finance Ministry has put the share of P2M UPI transactions left completely untouched by any of this at roughly 96% — this is a change aimed at higher-value merchant transactions, not everyday small purchases.
What this actually means for common payment types
The rules above sound abstract until you map them onto specific things people actually pay for. The classification hinges on one question every time: is this payment P2P (to another person's account) or P2M (to a registered merchant)? The MDR only ever touches the second — everything else below follows from that one distinction, plus which concessional bucket a merchant falls into.
Always free — P2P, regardless of amount
- Salary or employee payments — an employer paying an employee's personal bank account via UPI is a P2P transfer, not a merchant payment. Free at any amount.
- Paying a friend or family member back, splitting a restaurant bill, or moving money between your own accounts.
- Paying a freelancer, consultant, contractor, electrician or plumber into their personal savings-account UPI ID — still P2P. This flips to P2M (and the 0.4% above ₹2,000) only if they've onboarded a merchant/current-account VPA to receive payments, which is common once someone sets up a business UPI QR code via an aggregator. Worth knowing which one applies to you if you invoice clients by UPI.
- Rent paid directly to a landlord's personal UPI ID — P2P, free. Rent paid through a property-management or rent-collection platform (NoBroker, CRED, etc.) that receives it on a merchant VPA is P2M instead, and — since rent is almost always above ₹2,000 — the 0.4%/₹300 cap would apply there.
Free up to ₹2,000, then a flat ₹5 above it (essential-services concession)
- Mobile and DTH recharge
- Electricity, water, gas and broadband/utility bills
- Insurance premium payments
- Fuel payments at a petrol pump QR
- Railway ticket bookings
Most recharges and monthly bills stay under ₹2,000 anyway, so in practice these usually remain entirely free.
Free up to ₹2,000, then 0.02% capped at ₹300 above it (capital markets)
- Mutual fund purchases or one-off SIP top-ups
- Adding funds to a stock-broker/demat trading account
Free up to ₹2,000, then the standard 0.4% capped at ₹300 above it (default P2M)
This is the largest bucket — anything paid to a registered merchant that doesn't fall into one of the concessional categories above:
- Kirana/grocery and general retail purchases, once a shop's monthly UPI receipts cross the ₹1 lakh small-merchant threshold (see below)
- Restaurant bills and food delivery
- E-commerce purchases (Amazon, Flipkart, Myntra and similar)
- Big-ticket purchases — furniture, electronics, appliances (a ₹80,000 purchase is charged the capped ₹300 flat, not 0.4% of the full amount)
- Salon, gym, clinic and other services paid to a registered merchant
- Wholesale/B2B vendor and supplier payments — this is the one that matters most for traders and manufacturers, since B2B ticket sizes routinely clear ₹2,000
- Donations to an NGO/trust that receives via a merchant VPA
- Freelancer/consultant payments into a merchant VPA (see above)
Exempt regardless of ticket size, but for a different reason than "small merchant"
- UPI AutoPay mandates — SIP auto-debits, subscription renewals, loan EMIs and other standing instructions set up as a mandate, not a one-off payment.
- A small shop or vendor under the P2PM threshold — as long as total monthly UPI receipts stay under ₹1 lakh, every individual sale is free regardless of its own size. Cross ₹1 lakh/month for three consecutive months and the shop gets reclassified to standard P2M going forward.
- RuPay debit card payments, of any kind, at any value — untouched by this circular, still covered by the original 2020 statutory mandate.
Governed by an older, separate charge — not this circular, and not zero either
- RuPay Credit Card linked to UPI, above ₹2,000 — its own pre-existing ~1.95–2% + GST (waived for merchants under ₹20 lakh annual turnover), explicitly not the new 0.4%.
- Wallet/PPI-funded UPI payments above ₹2,000 — separately subject to the pre-existing PPI interchange (up to 1.1%) that's applied since 2023, running alongside rather than as part of this new rule; confirm with your PSP whether both can land on the same transaction.
Not yet clearly confirmed publicly — don't assume, ask directly
A few common payment types weren't clearly addressed in what NPCI/the government had published as of this writing, so treat these as open questions rather than settled facts:
- Paying your own credit card bill via UPI — unclear whether this is treated like a standard P2M biller payment (0.4% above ₹2,000) or exempted the way AutoPay mandates are.
- Government payments — GST portal payments, income tax e-filing, municipal/property tax paid via UPI. No confirmed exemption has been published; check the specific government portal's own notice closer to the rollout.
- Marketplace seller payouts (e.g., Amazon or Flipkart settling a seller's earnings) — this is typically a backend bank transfer rather than a customer-facing UPI P2M payment, and wasn't specifically addressed in the circular coverage available at the time of writing.
The charges that predate this — and are easy to confuse with it
The 0.4% MDR is new, but it isn't the only place UPI stops being free. These existed before 15 September 2026 and remain separate from the new rule:
RuPay Credit Card linked to UPI
Since 2022, customers can link a RuPay credit card to UPI apps and pay by QR code, same as from a bank account. This was never covered by the zero-MDR mandate — it carries ordinary card economics, currently around 1.95–2% plus 18% GST on transactions above ₹2,000, charged to the merchant. Merchants with annual turnover below ₹20 lakh are exempt from this charge entirely, even on larger transactions.
Notably, RuPay Credit Card–linked UPI and pre-sanctioned credit-line payments are explicitly exempt from the new 0.4% MDR — so these transactions aren't charged twice, but they were never "free" in the first place, and that's the part that surprises merchants: on the customer's screen it looks identical to a zero-cost bank-account UPI payment.
Wallet (PPI) payments routed through UPI
Since April 2023, UPI transactions funded from a Prepaid Payment Instrument — a wallet balance rather than a linked bank account — above ₹2,000 have carried a separate interchange fee of up to 1.1%, borne by the merchant. This is a distinct mechanism from the new 0.4% P2M MDR, set up under NPCI's earlier PPI-interchange framework rather than this month's circular. Whether and how the two now interact for the same transaction is one of the specifics worth confirming with your PSP rather than assuming either way.
Payment aggregator "platform" or "convenience" fees
If you collect UPI payments through an aggregator (Razorpay, Cashfree, PayU, Instamojo, or similar) rather than a raw bank UPI handle, read the fee schedule closely regardless of any of the above. Aggregators can pass through the new 0.4% MDR as-is, or bundle it into a blended service fee with their own markup on top — the two look identical on a settlement statement unless it's itemised. GST at 18% applies on top of any aggregator service fee, since it's a fee for a service, not a bank charge.
Soundboxes, QR stands and instant settlement
Unrelated to MDR entirely, but often confused with "the cost of UPI": the monthly rental for a payment soundbox after any free trial, and the extra fee some aggregators charge for same-day or instant settlement instead of standard T+1. Neither is MDR, but both are real recurring costs tied to accepting UPI.
Quick comparison: what applies where, from 15 October 2026
| Payment mode | MDR/interchange to merchant | Notes |
|---|---|---|
| UPI, ₹2,000 or below | 0% | Always free, any merchant |
| UPI, above ₹2,000 (standard) | 0.4%, capped at ₹300 | New from 15 Oct 2026 |
| UPI, above ₹2,000, small P2PM merchant (≤₹1 lakh/month) | 0% | Carved out of the new rule |
| RuPay debit card | 0% | Unaffected — separate 2020 mandate |
| RuPay credit card via UPI, above ₹2,000 | ~1.95–2% + GST (0% if turnover < ₹20 lakh) | Pre-existing, exempt from the new 0.4% specifically |
| PPI wallet via UPI, above ₹2,000 | Interchange up to 1.1% | Separate, pre-existing framework since 2023 |
| Railways / telecom / insurance / fuel, above ₹2,000 | ₹5 flat | Concessional category |
| UPI via aggregator dashboard | 0.4% (or bundled) + possible platform fee + 18% GST on the fee | Ask for an itemised schedule |
Simplified for comparison — confirm exact figures against your bank's or aggregator's current fee schedule, especially given some details were still being finalised as of publication.
What to check before 15 October 2026
- Work out whether your typical ticket size crosses ₹2,000. If most of your sales are under that, or you qualify as a small P2PM merchant under ₹1 lakh/month, this change may not touch you at all.
- Ask your bank or aggregator for the exact rate that will apply to your account, including whether you fall into a concessional category.
- Get the fee schedule in writing, itemising MDR, any aggregator platform fee, and GST separately — don't rely on a single blended "processing fee" line.
- Check settlement reports after 15 October, not just what was quoted beforehand.
- If you take RuPay Credit Card or wallet-funded UPI payments, confirm those rates specifically — they're governed by different, older frameworks than this new one.
- Watch for the finalised NPCI circular details on exact merchant-category eligibility, which were still pending clarification as this was written.
The bottom line
UPI's zero-MDR era for merchants ran from January 2020 to October 2026 — real, law-backed, and the reason UPI became the default at Indian tills. From 15 October 2026, that changes for transactions above ₹2,000: a 0.4% fee, capped at ₹300, borne by the merchant, with small vendors, low-value sales and P2P transfers carved out. Layer that against the charges that were already quietly sitting outside "zero MDR" — RuPay Credit Card on UPI, wallet interchange, aggregator platform fees — and "UPI is free" stops being a safe blanket assumption for any business doing meaningful transaction volumes. Read your fee schedule like a lease, and re-check it again once the new rule actually lands.
Sources
- RBI backs MDR on large-value UPI transactions, says users will pay no fee — Business Standard
- UPI Charges from 15 October 2026 — 0.4% MDR Explained — CA Jatin Karda & Co.
- Government exempts RuPay credit-card UPI payments from new 0.4% MDR — RetailIntel
- NPCI to levy 0.4% MDR on select UPI merchant payments above ₹2,000 — RetailIntel
- RuPay Credit Card on UPI: 0% vs 2% MDR Rules Explained — VyaparGateway
- Revised UPI MDR structure to leave salary payments and P2P transfers untouched — HR Katha
- GST on UPI MDR: Government rejects 'tax on UPI' rumours — Business Today
This post is based on NPCI's 15 September 2026 circular and the reporting above, current as of 18 September 2026. Rules on a change this fresh can still be amended before the 15 October rollout — re-check against your bank's own notice if you're making a decision based on this.