UPI’s MDR debate: who should pay to keep payments free?
NPCI’s confirmed October fees explained—and why funding UPI matters beyond the checkout.
UPI will remain free for consumers as India introduces fees on selected merchant payments. The change raises a larger question: if UPI makes payments easier for the whole economy, how should India pay to keep it running?
On 15 September 2026, the National Payments Corporation of India (NPCI) published its merchant discount rate (MDR) framework FAQ. The new merchant fees take effect on 15 October 2026.
MDR is the fee a business pays for accepting a digital payment. It is usually expressed as a percentage of the sale. Here, “discount” means an amount deducted from the merchant’s proceeds.
What changes on 15 October?
For eligible person-to-merchant (P2M) UPI payments above ₹2,000, the standard MDR is 0.4% of the transaction value, capped at ₹300 per transaction. At ₹75,000, the percentage reaches that cap; larger eligible payments do not carry a higher MDR.
The rules include important exceptions:
- Consumers pay no UPI fee. Person-to-person transfers remain free for both sender and recipient. Merchants cannot pass MDR on to buyers as an added UPI charge.
- Merchant payments up to and including ₹2,000 remain free. NPCI says these account for more than 95% of the number of P2M payments.
- Eligible micro-merchants remain exempt. The P2PM category covers small vendors receiving up to ₹1 lakh a month through UPI QR codes directly into their accounts. Their exemption also covers individual payments above ₹2,000.
- Certain categories pay a flat ₹5 instead. NPCI lists railways, telecom services, insurance and fuel, among others, for payments above ₹2,000. Its FAQ also specifies ₹5 for covered electricity, municipal water and piped-gas bills.
- Capital-market payments have a separate rate. Covered mutual-fund, securities, stockbroker and dealer payments carry 0.02%, capped at ₹300.
- UPI AutoPay mandates are exempt. The FAQ says automated recurring payments do not carry the prescribed MDR.
A ₹3,000 payment to a standard fee-paying merchant carries ₹12 in MDR. The same amount sent to a friend or an eligible micro-vendor remains free.
What the fee means for a merchant’s margin
Take an eligible ₹5,000 shop purchase at the standard 0.4% MDR from 15 October. The customer pays ₹5,000, the payment fee is ₹20, and the merchant is left with ₹4,980 before other costs.
- Customer pays
- ₹5,000
- MDR: 0.4% × ₹5,000
- − ₹20
- Merchant receives, after MDR
- ₹4,980
Assumes a standard-rate merchant and an eligible payment; exemptions and flat-rate categories excluded. Excludes taxes on the fee and other charges. The merchant still has to cover the cost of the goods and running the business.
A small percentage of sales can still matter to a business. Suppose this purchase would otherwise leave the shop ₹250 after its costs. A ₹20 fee reduces that amount to ₹230: an 8% reduction. The thinner the margin, the larger the share absorbed by the payment fee.
NPCI expects merchants to absorb the fee and prohibits an added UPI charge on the customer’s bill. Over time, businesses may adjust their general prices as operating costs change. How much they can pass through depends on competition and their customers’ willingness to pay.
A free payment still uses paid-for infrastructure
UPI connects participating banks and payment apps so that customers can move money between accounts. The app is the part you see. Behind it are systems that authenticate instructions, route messages, update accounts, detect suspicious activity and resolve failures. NPCI operates the common network, while banks and app providers bear their own processing, security and support costs.
Some costs rise with usage; others pay for capacity and reliability before the next payment arrives. The cost of one additional transaction is therefore different from the average cost of running the service. A network can process extra transactions cheaply while still needing substantial investment in security staff, backup systems and customer support.
India has already used public money to support this work. A government scheme for FY2024–25, with an estimated ₹1,500 crore outlay, offered a 0.15% incentive on eligible UPI payments up to ₹2,000 to small merchants. The money went through the merchant’s bank and was shared with other participants. Part of the payout depended on uptime and technical-failure performance.
Why the benefit is bigger than the transaction
Suppose one shop in your neighbourhood starts accepting UPI. That is useful to its customers. When the pharmacy, grocer, repair shop and local transport providers also accept it, carrying less cash becomes practical for many more people. Their willingness to use UPI, in turn, makes accepting it more worthwhile for the next merchant.
Economists call this a network effect: a service becomes more useful as more people can transact through it. An RBI speech on payments and financial inclusion described this chicken-and-egg problem long before the present MDR debate. Customers need places to pay; merchants need customers willing to pay that way.
Interoperability strengthens the effect. You do not need to join a shop’s particular app to pay it through the shared system. A 2025 BIS working paper models how interoperable fast-payment infrastructure can improve inclusion and welfare compared with separate, closed networks.
There is also the payment method that UPI may replace. Cash needs to be counted, stored securely, transported and deposited. Those activities use time and resources even when a customer sees no fee at the till. A Monetary Authority of Singapore speech explains why a social-cost comparison includes the resources used by banks, providers and merchants, while avoiding double-counting fees paid between them.
The same accounting principle is useful in India. A merchant’s fee is a cost to that merchant and revenue to a payment provider. Society’s underlying cost is the labour, equipment and other resources used to deliver the payment.
This is the strongest case for public support: making digital acceptance attractive can benefit people beyond the two parties to a sale. A funding decision should count those wider gains and any cash-handling costs avoided, alongside the cost of the digital service.
How fees could affect the network
Merchants may continue accepting UPI as readily, steer customers towards cash, or change their general prices. Their response will depend on which businesses are charged, their margins and the alternatives available.
Both cash and digital payments rely on infrastructure built to handle many transactions. A few payments shifting between them may fit within existing capacity; a sustained shift can change spending on cash collection, machines, servers and support. Comparing funding options therefore means looking at the costs that change over time.
It also matters where the money goes. NPCI says MDR revenue should support security, infrastructure and competition. Funding rules should reward better uptime, faster refunds and investment by the participants responsible for delivering them.
Three ways to share the bill
Public funding, merchant fees and revenue from other services can be combined. Each places the burden differently and creates a different accountability problem.
Public funding
Who funds it: The government budget
Keeps the transaction price low while supporting wider access.
The test: Are payments tied to efficient costs and reliable service?
Targeted MDR
Who funds it: Eligible merchants
Links provider revenue to use of the payment system.
The test: Do exemptions protect acceptance without making the rules easy to game?
Other services
Who funds it: Customers of optional products
Lets providers fund basic payments from other revenue.
The test: Can the basic service remain reliable and competitive on its own terms?
Broad public funding can be justified when the gains spread widely, but it competes with other uses of the budget. Targeting support at small merchants can protect acceptance where it is most fragile, while asking larger businesses to contribute. Clear merchant classifications help support reach the businesses that need it.
Commercial cross-subsidy is another possibility: a provider can earn from optional services while keeping basic payments free. But the core payment service then depends partly on a different business succeeding. And a provider without a profitable adjacent product may find it harder to compete.
What still needs watching
NPCI plans a small-merchant fund to support payment infrastructure and merchant onboarding, including in smaller centres. It will finalise the fund’s operational details with the RBI within three months.
Clear implementation guidance still matters: which merchant categories qualify for the flat rate, how banks apply exemptions, and how providers account for fees. Consumers also need to distinguish ordinary bank-account UPI payments from products such as credit-card-funded UPI, which have their own economics.
After implementation, judge the funding alongside merchant acceptance, payment failures and dispute-resolution times. Money reaching the banks and providers responsible for those services should produce improvements customers and merchants can use. The fee succeeds if it helps sustain the network without driving away the businesses that make it valuable.