The government has introduced a new framework for the Unified Payments Interface (UPI) under which all person-to-person (P2P) transactions will remain completely free, while a nominal Merchant Discount Rate (MDR) will apply to specified high-value merchant payments. According to the Ministry of Finance, there will be no charge on P2P UPI transactions, irrespective of the amount transferred. P2P transactions account for around 70% of total UPI transaction value and will remain outside the MDR framework.
Merchant payments (P2M) of up to Rs 2,000 will also continue to be free. Small merchants, including street vendors and neighbourhood shops, receiving up to Rs 1 lakh per month through UPI QR codes under the Person-to-Person-Merchant (P2PM) category will continue to get zero MDR on all transactions.
As a result, about 96% of all merchant transactions will remain unaffected. MDR will apply to only around 4% of merchant transactions, primarily payments above Rs 2,000 that do not fall under the zero-MDR provisions.
For eligible P2M transactions above Rs 2,000, MDR has been fixed at 0.4%. For transactions of Rs 75,000 and above, the MDR will be capped at Rs 300 per transaction. The charge will be distributed among banks, payment service providers and UPI application providers rather than collected as a government tax or fee.
Transactions above Rs 2,000 in essential and thin-margin sectors such as railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat MDR of Rs 5 per transaction. Payments related to mutual funds, securities, stockbrokers and dealers will carry a lower MDR of 0.02%, capped at Rs 300.
The government has clarified that customers will not have to pay MDR. Banks have been advised to ensure merchants do not pass the charge on to customers, while UPI application providers have been prohibited from imposing platform fees or hidden charges.
Individuals will continue to have unlimited free UPI usage, with no monthly quotas, volume restrictions or tiered caps. Daily transaction limits, generally ranging between Rs 1 lakh and Rs 5 lakh depending on the category, will continue to serve as security and risk-management measures and will not constitute charging thresholds.
A dedicated fund will also be created to promote UPI adoption among small merchants. Five per cent of total MDR collections will be contributed to the fund to support wider acceptance, sustained usage and greater participation of small businesses in digital payments.
The framework has been introduced under the Payment and Settlement Systems Act, 2007, following deliberations by the UPI Steering Committee. Revenue from larger merchant transactions will support banks and payment ecosystem providers in expanding payment infrastructure, including in rural and semi-urban areas. The move is also in line with the 32nd Report of the Standing Committee on Finance, which stressed the need for a viable revenue model for the digital payments ecosystem.