Merchants to pay 0.4% fee on UPI payments over Rs 2,000

Why in the News

The National Payments Corporation of India (NPCI) has restored a Merchant Discount Rate (MDR) of 0.4 percent on Unified Payments Interface (UPI) payments above Rs 2,000, payable by the merchant and capped at Rs 300 a transaction, with effect from 15 October. MDR on UPI and RuPay debit cards was removed in January 2020 to accelerate adoption of digital payments, and payment providers have since sought its return to meet infrastructure and settlement costs. The framework follows the Centre’s notification a day earlier barring any charge on UPI payments below Rs 2,000 and on RuPay debit card payments. The Union Ministry of Finance has advised banks to ensure merchants do not pass the cost on to customers, and that advice carries no prohibition behind it.

What is the Merchant Discount Rate?

1. Merchant Discount Rate: It is the fee a business pays on a digital payment it receives, deducted from the amount finally credited to the business rather than added to the customer’s bill.
2. Person to merchant payments: The fee applies only to person to merchant (P2M) payments, where a customer pays a business. Person to person transfers between individuals carry no fee.
3. Who counts as a merchant: An e-commerce website, grocery shop or shopkeeper receiving more than Rs 1 lakh a month from customers through UPI is classified as a merchant.
4. Who receives the fee: The charge is shared between banks, payment apps and payment service providers.

What does the new framework charge, and on which payments?

1. Slab structure: Payments up to Rs 2,000 attract no MDR, and payments from Rs 2,001 to Rs 74,999 attract 0.40 percent. Eg. A merchant receiving Rs 10,000 pays Rs 40.
2. Absolute cap: Payments of Rs 75,000 and above attract a fixed Rs 300, so the charge does not rise beyond that point.
3. Flat fee for essential categories: A flat Rs 5 applies to payments for rail tickets, fuel, agricultural inputs, credit card dues, telecom and utility bills, insurance premiums and taxes. The stated purpose is to stop costs rising in critical public services and in sectors with thin profit margins.
4. Capital market payments: UPI payments to mutual funds, securities and stock brokers carry a lower 0.02 percent fee, intended to encourage retail participation in formal financial markets.
5. Autopay exemption: Systematic Investment Plan (SIP) payments and recurring standing instructions carry no fee at all. Eg. Monthly utility bills and OTT streaming subscriptions set on autopay.
6. Review cycle: The charges are to be reviewed every six months to one year.

Who stays outside the fee?

1. Person to person transfers: These remain free, with no monthly quota, volume limit or tiered cap on free transactions for individuals.
2. Small merchants under P2PM: A merchant receiving up to Rs 1 lakh a month through UPI QR codes faces zero MDR under the Person to Person Merchant (P2PM) framework.
3. Purpose of the category: It bridges informal street vendor setups and formal merchant acquiring accounts, keeping digital acceptance costless for micro businesses in the unorganised sector.
4. Migration trigger: A merchant crossing Rs 1 lakh a month for three consecutive months is moved into the P2M category and becomes liable for MDR.
5. Daily limits are not charges: Daily transaction limits of Rs 1 lakh to Rs 5 lakh enforced by banks and NPCI are risk management measures and carry no cost.

Why was the zero MDR regime abandoned?

1. Zero MDR since January 2020: The charge was removed on UPI and RuPay debit cards to accelerate adoption, leaving the network running without a transaction revenue stream.
2. The subsidy substitute: The Centre has since covered part of the cost through the Incentive scheme for promotion of RuPay Debit Cards and low-value BHIM-UPI transactions (P2M), capped at 0.15 percent of transaction value and not extending to large merchants.
3. Industry cost claim: Payment providers have put their infrastructure and transaction settlement costs at around Rs 20,000 crore a year.
4. The regulator’s position: The Reserve Bank of India (RBI) backed MDR on large value UPI payments as necessary for the long term sustainability of India’s digital payments ecosystem.
5. Comparison with cards: Debit and credit card payments already carry an MDR of 1 to 3 percent, well above the rate now set for UPI.

What is the revenue meant to fund?

1. Technology and acceptance networks: RBI’s stated position is that a fair distribution of MDR among ecosystem participants supports continued investment in technology, infrastructure and payment acceptance networks.
2. Competition in fintech: NPCI expects the fee to let new fintech startups and technology companies enter digital payments and compete with well capitalised conglomerates.
3. Security spending: MDR revenue is also to fund cyber security infrastructure, artificial intelligence driven fraud detection and encryption upgrades.
4. Small merchant fund: Five percent of all MDR collected goes into a dedicated fund to help small merchants accept UPI payments.

How much of UPI does the fee actually touch?

1. Share of volume: Payments above Rs 2,000 are only 4 percent of all UPI payments to merchants, and the remaining 96 percent sit below that ticket size.
2. Share of value: Those same payments carry two thirds of all person to merchant value, so a small slice of volume is a large slice of money.
3. Industry categories: The flat Rs 5 categories account for 17 percent of P2M transactions by volume and 46 percent by value.
4. Scale of the network: UPI carried more than 24,000 crore transactions worth Rs 314 lakh crore in 2025-26.

Challenges to the Merchant Discount Rate on UPI

1. Pass through to customers is unenforced: The Union Ministry of Finance has only advised banks to ensure merchants do not recover the fee from buyers. Eg. Card MDR is routinely recovered through visible surcharges at fuel stations and on utility payments.
   The Fix: Convert the advisory into a binding condition of the acquiring bank’s merchant agreement, with the acquirer answerable for a surcharge its merchant levies.
2. The Rs 1 lakh threshold creates a splitting incentive: A merchant near the P2PM ceiling gains by routing collections across several QR codes or accounts to stay below it. Eg. Value splitting across accounts is a documented pattern around registration thresholds for small traders under the Goods and Services Tax.
   The Fix: Anchor the P2PM classification to the merchant’s permanent account number rather than to an individual bank account or QR code.
3. A flat cap favours the largest tickets: Because the charge stops at Rs 300, the effective rate falls as the payment size rises, so the biggest sellers pay proportionately least. Eg. A Rs 5 lakh payment carries an effective rate of 0.06 percent against 0.40 percent on a Rs 10,000 payment.
   The Fix: Tier the cap by merchant turnover band so the concession reaches smaller sellers rather than the largest acquirers.
4. Concentration in the payments market: MDR revenue accrues to banks and payment service providers in a market where two applications already carry most UPI volume. Eg. NPCI’s own 30 percent market share cap on third party UPI applications has been deferred repeatedly rather than enforced.
   The Fix: Tie disbursal from the small merchant fund to acquirers that add new merchants outside the largest cities.
5. Adoption risk in the unorganised sector: A visible charge on larger payments gives merchants a reason to steer high value sales back to cash. Eg. Currency in circulation continued to grow through the years of zero MDR and rapid UPI expansion.
   The Fix: Publish the share of high value merchant collections leaving UPI as part of each scheduled review, so the review has a trigger rather than only a date.

Conclusion

Costless merchant acceptance on the country’s dominant retail payment network has ended for large payments, and the terms are set to be revisited at fixed intervals rather than settled once. The unresolved question is who finally bears the charge, since the protection against merchants recovering it from customers is an advisory and not a prohibition. The thing to watch at the first review is whether large ticket merchant collections stay on the network or shift back to cash.

Back2Basics: National Payments Corporation of India

1. Nature: It is the umbrella organisation for retail payments and settlement systems in India, incorporated as a not for profit company.
2. Founding: It was set up in 2008 by the Reserve Bank of India and the Indian Banks’ Association, under Section 25 of the Companies Act, 1956, now Section 8 of the Companies Act, 2013.
3. Statutory basis: It operates under the Payment and Settlement Systems Act, 2007, which gives RBI authority over payment systems.
4. Products: It runs UPI, RuPay, IMPS, NACH, AePS, FASTag and BHIM.

Matching Previous Year Question

“Which of the following is a most likely consequence of implementing the ‘Unified Payments Interface (UPI)’?”