India’s digital payments system is set for a major change as the National Payments Corporation of India (NPCI) has introduced a 0.4% Merchant Discount Rate (MDR) on specified UPI payments made to merchants above ₹2,000. The new framework will take effect from October 15, 2026.

The new charge applies to eligible person-to-merchant (P2M) transactions. Importantly, it is a charge within the merchant-payment ecosystem and not a direct fee for consumers using UPI. Person-to-person transfers will remain completely free regardless of the amount.

For eligible merchant payments above ₹2,000, the MDR will be 0.4% and will be capped at ₹300 per transaction. For example, a ₹10,000 eligible merchant payment would generate an MDR of ₹40 within the payment ecosystem.

Small merchants also receive protection under the new framework. Merchants receiving up to ₹1 lakh per month through UPI QR payments under the specified small-merchant category will continue to receive zero MDR.

Several essential sectors have been given a separate structure. Payments above ₹2,000 involving railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat MDR of ₹5 rather than the standard 0.4%. Certain government utility and educational payments also receive special treatment.

The government says approximately 96% of merchant transactions will remain unaffected, while the MDR revenue will be distributed among participants in the UPI ecosystem, including banks and payment service providers, to support infrastructure, cybersecurity and continued expansion of digital payments.

The change marks a significant shift after years in which UPI merchant payments largely operated without a standard MDR. However, UPI itself will continue to be free for consumers, and the new framework does not introduce a general fee for sending money to another individual.