The new Unified Payments Interface (UPI) framework will have no impact on person-to-person transactions, with all P2P UPI payments continuing to remain completely free irrespective of the amount transferred.
The framework will also keep merchant payments up to ₹2,000 free of Merchant Discount Rate (MDR). Transactions covered under the zero-MDR framework for small merchants will also remain unaffected.
As a result, approximately 96% of all person-to-merchant (P2M) transactions will continue without MDR, with the charge applying only to specified merchant transactions above ₹2,000.
P2P payments remain completely free
Under the framework, individuals will not be charged any transaction fee, platform fee or other charge for sending or receiving money through UPI.
P2P transactions account for around 70% of the total value of UPI transactions and will remain completely outside the MDR framework.
Customers will also continue to have unlimited free usage of UPI, with no monthly quotas, volume restrictions or tiered caps on free transactions.
Daily transaction limits prescribed by banks and NPCI, generally ranging from ₹1 lakh to ₹5 lakh depending on the transaction category, are security and risk-management measures and do not represent charging thresholds.
MDR applies to specified merchant payments
A nominal MDR of 0.4% will apply to P2M transactions above ₹2,000.
For transactions of ₹75,000 and above, the MDR will be capped at ₹300 per transaction.
The MDR will be distributed among participants in the payment ecosystem, including banks, payment service providers and UPI application providers, to support the operation and expansion of the digital payments infrastructure.
MDR is neither a tax nor a charge collected by the Government or NPCI.
Essential sectors get flat ₹5 MDR
Transactions above ₹2,000 in specified essential and thin-margin sectors will attract a flat MDR of ₹5 per transaction.
The sectors include railways, telecommunications, insurance, fuel and agricultural inputs.
The flat rate is intended to provide greater cost certainty for public services and businesses operating on relatively narrow margins.
Capital market transactions, including payments relating to mutual funds, securities, stockbrokers and dealers, will attract an MDR of 0.02%, capped at ₹300 per transaction.
Customers will not pay MDR
The MDR is a charge within the merchant payment ecosystem and is not intended to be imposed on customers making UPI payments.
Banks have been advised to ensure that merchants do not pass MDR charges on to customers. UPI application providers are also prohibited from imposing platform fees or hidden charges.
This means customers will continue to make UPI payments without directly bearing the MDR.
96% of merchant transactions unaffected
Data analysis indicates that MDR will apply to only around 4% of merchant transactions.
Approximately 96% of P2M transactions will therefore remain unaffected, either because the transaction value is below ₹2,000 or because the transactions are covered by the zero-MDR framework for small merchants.
The framework is consequently designed to protect individuals, micro-enterprises and small businesses while introducing a limited charge on larger merchant transactions.
Small merchants to get dedicated support
A dedicated fund will be established to promote UPI adoption among small merchants.
An amount equivalent to 5% of total MDR collections will be contributed to the fund, which will support wider UPI acceptance, sustained usage and greater participation by small businesses in India’s digital payments ecosystem.
Small merchants, including street vendors and neighbourhood shops, receiving up to ₹1 lakh a month through UPI QR codes under the Person-to-Person-Merchant (P2PM) category will continue to enjoy zero MDR on all transactions.
Framework aimed at sustaining UPI growth
The framework has been introduced under the Payment and Settlement Systems Act, 2007, following deliberations by the UPI Steering Committee on applicable rates, operational arrangements and consumer safeguards.
The framework seeks to create a sustainable revenue mechanism for the payments ecosystem while keeping UPI free for individuals and protecting small merchants from additional payment costs.
Revenue from larger merchant transactions will support banks, payment service providers and UPI application providers in maintaining and expanding payment infrastructure, including in rural and semi-urban areas.
The framework is also aligned with the recommendation of the Standing Committee on Finance in its 32nd Report, which highlighted the importance of establishing a viable revenue model for the UPI ecosystem.