MDR on UPI Payments: What Customers and Merchants Need to Know From October 15

UPI payments will remain free for customers from October 15, but the experience will change for some businesses accepting payments through the platform. 

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Under the new framework, certain merchants will have to pay a merchant discount rate, or MDR, on UPI transactions above ₹2,000. Small vendors will continue to be protected from the charge as long as they fall within the prescribed merchant category. 

The distinction is important: the new fee is paid by eligible merchants, not by customers making UPI payments. 

Customers will continue to pay nothing extra 

For people using UPI for everyday payments, there is no additional charge. 

A customer buying something through UPI will continue to pay the listed price, just as they would when paying by cash or card. Any applicable MDR is borne by the merchant accepting the payment. 

Transfers between individuals also remain unaffected. Money sent to family members, friends or colleagues is classified as a person-to-person, or P2P, transaction and does not attract the fee, irrespective of the amount transferred within existing UPI limits. 

Recurring transactions through UPI AutoPay are also outside the MDR framework. This covers payments such as OTT subscriptions, systematic investment plans and utility bills. 

Small merchants remain outside the MDR net 

Not every shopkeeper accepting a payment of more than ₹2,000 will have to pay the new charge. 

Small vendors and micro merchants receiving up to ₹1 lakh a month directly into their bank accounts through UPI QR codes fall under the person-to-person-merchant, or P2PM, category. 

This group includes both informal street vendors and formal commercial merchants. 

Businesses classified as P2PM will continue to pay no MDR, irrespective of the value of an individual transaction. 

That means a small merchant receiving less than ₹1 lakh a month through UPI will not suddenly face a charge simply because one customer makes a payment exceeding ₹2,000. 

When does a small merchant move into the MDR category? 

A small vendor does not automatically lose the exemption after crossing ₹1 lakh in UPI collections during a single month. 

The change happens if the merchant receives more than ₹1 lakh through UPI for three consecutive months. 

Such a merchant is then transitioned from the P2PM category to the person-to-merchant, or P2M, category. MDR becomes applicable only after the acquiring bank or payment service provider formally classifies the business as P2M. 

For merchants, therefore, both the account classification and the size of individual transactions matter. 

How much will larger merchants pay? 

Businesses classified as P2M will pay an MDR of 0.4% on individual UPI transactions above ₹2,000. 

Payments of ₹2,000 or less remain free of MDR. 

The fee is also capped for larger transactions. On UPI payments of ₹75,000 or more, the maximum MDR is ₹300 per transaction. 

Consider a P2M kirana store accepting three different payments. 

If a customer pays ₹1,500, there is no MDR because the transaction does not cross ₹2,000. 

For a ₹10,000 purchase, the 0.4% MDR works out to ₹40. The merchant pays ₹40, along with GST applicable on the MDR, to the bank enabling it to accept the UPI payment. 

On a ₹1 lakh purchase, a 0.4% calculation would ordinarily produce a ₹400 charge. Since the fee is capped at ₹300 for payments of ₹75,000 and above, the merchant pays ₹300 plus GST instead. 

In all three cases, the customer pays nothing extra. 

₹2,000 is a transaction threshold, not a daily limit 

The ₹2,000 figure could also cause confusion among merchants, particularly those receiving a large number of smaller payments. 

According to NPCI, ₹2,000 is the threshold for each individual transaction. It is not a daily limit on how much a merchant can receive through UPI. 

There is no cap on cumulative or repeated transactions below ₹2,000. 

For a P2M business, this means several individual payments of ₹2,000 or less can be received without attracting MDR, even if their combined value during the day is considerably higher. 

Some businesses will pay a flat ₹5 

The 0.4% rate will not apply in the same way across every merchant category. 

For specified categories including railways, telecom services, insurance, fuel, bill payments and education, among others, UPI payments above ₹2,000 will attract a flat MDR of ₹5 per transaction. 

Here too, the charge is borne by the merchant rather than the customer. 

UPI remains cheaper than typical card MDRs 

The new UPI fee also differs from the charges typically associated with card payments. 

Standard credit card MDRs generally range between 1.5% and 2.5% per transaction, while debit card MDRs are capped at up to 0.90%. 

For eligible P2M UPI transactions above ₹2,000, the MDR will be 0.4%, with the ₹300 ceiling applying to payments of ₹75,000 or more. 

For customers, however, the central point remains unchanged when the new framework takes effect on October 15: making a UPI payment itself will not carry an additional fee. The change applies on the merchant side, and whether a business pays MDR will depend on its classification, the value of the individual transaction and, in some cases, the category in which it operates.