Who has to pay MDR on UPI and who stands to gain the most?

Why in the News

The National Payments Corporation of India (NPCI) has released a circular allowing a Merchant Discount Rate (MDR) to be levied on certain Unified Payments Interface (UPI) payments from 15 October. The charge falls on person to merchant (P2M) payments above Rs 2,000 and is paid by merchants to payment processors and banks rather than by consumers. The circular follows a long public argument over whether UPI would be charged at all, which the Ministry of Finance answered with a press release saying banks have been advised to ensure merchants do not pass the charge on to customers, and that UPI application providers are expressly prohibited from imposing platform fees or hidden charges on users. The tension is over incidence. The Opposition argues the charge will raise prices for consumers, while the government argues it will not, and that even the impact on merchants will be minimal.

What is the Merchant Discount Rate (MDR)?

1. Definition: MDR is a fee for using UPI that is paid by the merchant to the payment processors and the banks that carry the transaction. Consumers do not pay it directly.
2. Who it is collected from: It is deducted from the merchant’s receipts, so the merchant receives less than the amount the customer sent.
3. Coverage on UPI: It applies only to person to merchant payments above a value threshold, not to transfers between two individuals.

What does a merchant actually pay, and on which transactions?

1. The standard rate: Mid to large sized merchants receiving UPI payments in excess of Rs 2,000 per transaction pay 0.4% of the transaction value.
2. The absolute cap: For transactions of Rs 75,000 and above, the MDR is capped at Rs 300 per transaction, so the charge stops rising with the ticket size.
3. Essential and thin margin sectors: Transactions of Rs 2,000 or more in railways, telecommunications, insurance, fuel and agricultural inputs attract a flat Rs 5 per transaction. The stated purpose is cost certainty for critical public services and for businesses operating on narrow margins.
4. Capital market payments: Payments to mutual funds, stockbrokers, dealers and for equities attract 0.02%, capped at Rs 300 per transaction, a lower rate justified as support for retail participation in formal financial markets.

How much of UPI escapes the charge altogether?

1. Person to person transfers: All P2P transactions remain free regardless of amount, under the specification that no transaction fee, platform fee or other charge may be imposed on individuals for sending or receiving money through UPI. P2P is about 37% of total UPI transaction volume.
2. Small ticket merchant payments: Payments to merchants of up to Rs 2,000 remain free of MDR, and these are another 60.5% of all UPI transactions by volume.
3. The combined exemption: Taken together, 97.5% of all UPI transactions remain free, since P2M payments above Rs 2,000 are just 2.5% of volume.
4. Small merchants and street vendors: Merchants receiving up to Rs 1 lakh per month through UPI QR codes under the Person to Person Merchant (P2PM) category are exempt, which pushes the charged share below 2.5%.

How large is the revenue pool, and how is it divided?

1. Value concentration: P2M transactions above Rs 2,000 are only 2.5% of volume but 20% of all UPI transactions by value.
2. The monthly ceiling: Of the Rs 29.8 lakh crore transacted over UPI in August 2026, P2M payments above Rs 2,000 were Rs 5.99 lakh crore, so the absolute maximum collectible is about Rs 2,400 crore a month. The caveats, exemptions, flat rates and caps mean the actual receipts will be lower.
3. The split: The payer’s bank takes about 40%, because it holds the customer’s account and bears the core authorisation, security and settlement costs. The merchant’s bank takes 30% for managing the merchant relationship, QR code deployment and merchant settlements.
4. The technology layers: The UPI app or Third Party Application Provider (TPAP) receives 20%, and the Payment Service Provider that links the technology partner bank to the central network switches receives the final 10%.
5. The promotion fund: A dedicated fund to promote UPI adoption among small merchants will receive an amount equal to 5% of total MDR collections. The circular does not specify which payment system player contributes that 5%.

Which institutions stand to gain the most?

1. Yes Bank on both legs: It is the payer bank in more than 50% of all UPI transactions and the payee bank in about 55%, so it collects the largest share of both the 40% and the 30% pools.
2. The next largest banks: ICICI Bank is the second largest payer bank at 18.3%, and Axis Bank is the second largest payee bank at about 19%.
3. The two dominant apps: PhonePe accounts for about 46% of UPI transactions by volume and Google Pay another 32%, so the TPAP pool flows overwhelmingly to two applications.

Challenges to the MDR on UPI

1. Pass through to consumers: The instruction that merchants must not recover the fee from customers is an advisory rather than an enforceable term, so the cost can surface as a higher listed price. Eg. Surcharging on card payments continued at fuel outlets and small retailers for years after similar advisories were issued.
   The Fix: Write the no pass through condition into the merchant onboarding agreement of the acquiring bank, with a customer complaint route attached to it.
2. Structuring below the threshold: A hard cut off at Rs 2,000 rewards splitting a single large payment into several smaller ones, which costs the payment system volume without collecting revenue. Eg. Cash dealings were routinely broken up below the Rs 2 lakh limit introduced under Section 269ST of the Income Tax Act, 1961 in 2017.
   The Fix: Charge on the merchant’s monthly aggregate receipts above a threshold rather than on each transaction, so splitting yields no saving.
3. The cliff at the small merchant limit: The P2PM exemption ends abruptly once monthly receipts cross Rs 1 lakh, so a marginal increase in turnover removes the exemption from the whole of a merchant’s qualifying receipts. Eg. A vendor receiving Rs 1.05 lakh a month loses the exemption entirely rather than on the excess alone.
   The Fix: Taper the charge above the limit so only receipts beyond Rs 1 lakh attract MDR.
4. Reinforcement of app concentration: A revenue stream keyed to transaction share rewards the applications that already hold most of the market. Eg. NPCI’s cap limiting any third party application to 30% of UPI volume has been deferred repeatedly since it was first framed in 2020.
   The Fix: Weight the small merchant promotion fund toward applications below a defined market share, so the subsidy runs against concentration rather than with it.

Conclusion

The charge is deliberately narrow in reach and wide in value. Almost all of UPI stays free, yet the fifth of transaction value that is charged sits with a small set of banks and two applications, which is where the revenue will settle. Whether the advisory against pass through holds is the thing to watch once the framework takes effect on 15 October.

Back2Basics: National Payments Corporation of India (NPCI)

1. What it is: An umbrella organisation for retail payments and settlement systems in India, incorporated in 2008.
2. Legal and institutional basis: It was set up as a not for profit company under the guidance of the Reserve Bank of India and the Indian Banks’ Association, and operates under the Payment and Settlement Systems Act, 2007.
3. Systems it runs: UPI, RuPay, the Immediate Payment Service, the National Automated Clearing House, FASTag and the Aadhaar Enabled Payment System.
4. Rule making role: It sets the operating circulars, pricing rules and participation norms that member banks and third party applications must follow on these systems.

Matching Previous Year Question

“[2018] Which one of the following best describes the term “Merchant Discount Rate” sometimes seen in news? (a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank. (b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services. (c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards. (d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards. Answer: (c)”