MDR charges on UPI transactions: New rule to be implemented from October 15

The Lok Sabha last month approved the bill, which allows banks and other payment service providers to charge fees on transactions done through the country's instant payment network.

The purpose of this bill was to remove the legal provision that prevented banks and payment service providers from charging Merchant Discount Rate (MDR).

MDR is a small fee. Whenever a customer makes a digital payment, the shopkeeper gives MDR to the bank and payment service provider.

Fintech companies were demanding MDR for a long time.

The argument of these companies has been that with the rapid increase in the number of transactions, processing UPI payments without any merchant fees is no longer economically sustainable.

At the same time, the Indian government says that it wants to make UPI financially self-reliant, hence it decided to impose MDR.

This change comes at a time when the payments industry has long warned that the annual subsidy for the Unified Payments Interface, or UPI, has never been sufficient to meet the actual cost of running it. This matter has also been discussed in the Parliamentary Standing Committee on Finance.

The Reserve Bank of India has welcomed this MDR.

"A fair and balanced distribution of MDR among all parties involved in the ecosystem will encourage continued investment in technology, infrastructure and payment acceptance networks. This can help UPI become more accepted in more places, expand the customer base and support continued growth in transaction volumes," the central bank wrote on X.

The Reserve Bank of India had given mixed signals last month regarding MDR. In the press conference after the meeting of the Monetary Policy Committee in the first week of August, RBI Governor Sanjay Malhotra had said that someone will have to bear the cost of running the infrastructure.

However, he stressed that the RBI's focus is on keeping digital payments "accessible, affordable, secure and sustainable".

RBI aims to reach 100 crore users of UPI by 2030. This is a very ambitious target compared to the 55.5 crore users connected so far. These figures have been shared in Parliament.

Banks and payment companies have long sought a way to recover the costs of running and securing the system. In the current budget, the government has allocated Rs 2,000 crore under an incentive scheme to compensate banks for zero-MDR transactions.

The British newspaper Financial Times wrote in a report, "According to some estimates, this amount is less than 15 percent of the annual cost of maintaining and updating the system." This especially includes the cost of large investments made to keep systems safe from cyber attacks. Till now the government's stance was that UPI is a public facility and banks should also contribute to its cost.

But the Indian government has taken this decision after the report of the United States Trade Representative (USTR) of March 2026. In the USTR report, India's free digital payments policy was described as a trade barrier.

According to the report, this causes losses to companies like Visa and MasterCard, because they charge a fee on every transaction. It is also worth noting that 80 percent of UPI transactions are processed through Google Pay and Walmart-owned PhonePe.

From October 15, if a person makes a payment of more than Rs 2,000 through UPI while purchasing goods from a shop, 0.4 percent merchant discount rate (MDR) will be applicable. But this MDR will not be collected from the customer but from the shopkeeper.

Suppose you make a purchase of Rs 2100 from a shop and make payment through UPI, then the shopkeeper will have to pay Rs 8.4 as MDR. A maximum MDR of Rs 300 will be charged on transactions of Rs 75,000 or more. Person-to-person payments and most everyday small merchant payments will remain free as before.

National Payments Corporation of India (NPCI), which operates the UPI network, said that the revenue from this fee will be used to invest in infrastructure strength, cyber security, fraud prevention, innovation and customer service.

"MDR revenue will be distributed only within the UPI ecosystem to further invest in infrastructure strength, innovation, cyber security and customer service," NPCI said.

Government and NPCI say that UPI is much cheaper than cards even after MDR. NPCI said in a statement that MDR on normal credit cards is usually between 1.5% to 2.5% while on debit cards it can be up to 0.90%. Launched nearly a decade ago, UPI is now the world's largest real-time payment system in terms of number of transactions.

The fintech industry has welcomed the government's decision for payment companies. American media outlet Bloomberg wrote in one of its reports, "These companies have played an important role in popularizing UPI, but they had no clear way to monetize it."

Amrish Rau, CEO of payments company Pine Labs, in a post on

Critics say that this is a kind of tax imposed on businessmen. They argue that businesses may try to pass this cost on to customers through indirect means, which may affect the pace of expansion of UPI.

"Any MDR on UPI will destroy the one thing in India that is working like a clock without any interruption," Ashneer Grover, co-founder and former managing director of Bharat Pay, said in a post on X.

The policies of the Government of India have been to encourage digital payments.

To promote digital payments, the government had abolished the fees charged from merchants on UPI and Rupay debit card transactions.

In return, funds were provided to banks and fintech companies in the budget every year.

NPCI has said that according to industry estimates, the annual cost of operating UPI is around Rs 20,000 crore. This includes costs like servers, bandwidth, fraud prevention and technical support of banks. A parliamentary committee report in March also said that due to the absence of MDR, it is becoming difficult to keep UPI financially sustainable.

According to news agency PTI, the government has allocated Rs 2,000 crore for 2026-27 for the operation of UPI and RuPay. This gap between the cost of running a rapidly growing payments network and the willingness or ability of governments to finance it has been one of the main reasons why the payments industry has called for the implementation of regulated MDR.

In its FAQs on the new framework, NPCI described the annual incentive as “short-term bridge funding rather than a permanent arrangement.”

NPCI also said that relying only on budgetary allocations creates uncertainty over funding and limits long-term technology investments from fintech companies along with banks.