New Delhi, Sep 15: Ending nearly six years of fully free UPI payments, the government on Tuesday introduced a 0.4 per cent fee on transfers worth more than Rs 2,000 made to merchants through the platform from October 15 while explicitly ring-fencing everyday person-to-person transactions as well as small payments from any charge.
“Customers will not be required to pay any charge when making such payments through UPI,” the finance ministry said in a statement, adding, “MDR is a charge within the merchant payment ecosystem. It is not a charge on customers making UPI payments.”
Also, individuals will continue to have “unlimited free usage, with no monthly quotas, volume restrictions or tiered caps on free UPI transactions”, it said.
The carefully calibrated move signalled the end of an era for the world’s largest real-time payments system even as the government tried to avoid alarming the hundreds of millions of daily users. The move drew sharp criticism from the opposition parties. Congress leader Rahul Gandhi alleged that the levy was “once again surrender” by a “compromised” Prime Minister Narendra Modi to American pressure. The BJP hit back, accusing the Congress of spreading “fake news”, saying the government had made it absolutely clear that MDR charges would not be levied on consumers.
From October 15, a 0.4 per cent Merchant Discount Rate (MDR) will be levied on person-to-merchant (P2M) transactions above Rs 2,000 through UPI (Unified Payments Interface), capped at Rs 300 for payments of Rs 75,000 and above.
Essential and thin-margin sectors — railways, telecom, insurance, fuel and agricultural inputs — will pay a flat MDR of Rs 5 per transaction above Rs 2,000, intended to keep costs predictable for critical services; these categories account for nearly 17 per cent of P2M transaction volume but roughly 46 per cent of P2M transaction value.
The same flat-fee treatment extends to government utility bill collection (electricity, water, piped gas) and educational fee payments such as school tuition and university fees above Rs 2,000, both similarly exempted below that threshold.
Payments into mutual funds, securities and through stockbrokers and dealers will attract a lighter 0.02 per cent MDR, capped at Rs 300 — a rate designed to keep the cost of investing low and encourage retail participation in formal financial markets.
Person-to-person (P2P) transfers — which make up 37 per cent of UPI’s transaction volume and 70 per cent of its transaction value — will continue to attract zero charges, irrespective of size. Small-value transactions up to Rs 2,000, which the government said account for more than 95 per cent of total P2M volume, remain untouched.
The charges so collected will be distributed among the firms facilitating the transactions and are being introduced to bolster investment into infrastructure resilience, innovation, cybersecurity and customer service, the National Payments Corporation of India said.
“Charges will apply only to person-to-merchant (P2M) transactions exceeding Rs 2,000,” the finance ministry said in a statement. “A nominal merchant discount rate of 0.4 per cent will be levied on P2M transactions above Rs 2,000. This commission will be shared amongst the payment ecosystem partners including banks and app providers.”
The government has also moved to prevent the new charges from being quietly passed on to consumers: UPI app providers are barred from levying platform fees or hidden charges, and banks have been directed to ensure merchants do not pass MDR costs on to customers.
There will be no monthly quotas or volume limits for free UPI transactions for individuals.
The framework layers different rates across categories of transactions rather than applying a blanket charge. On a Rs 3,000 purchase, the 0.4 per cent rate works out to a Rs 12 fee paid by the merchant to its acquiring bank; on a Rs 50,000 purchase, it comes to Rs 200. On a Rs 1,00,000 purchase, the percentage calculation would otherwise total Rs 400, but the fixed Rs 300 ceiling applies instead — a structure designed to keep high-value transaction costs predictable.
The MDR applies only to direct user-account-to-merchant-account UPI payments; credit-linked transactions such as RuPay Credit Cards on UPI or pre-sanctioned credit lines follow separate card rules, and automated recurring payments — UPI Mandates or AutoPay used for utility bills, OTT subscriptions and recurring investments – carry no MDR at all.
Small merchants remain the most protected category. Vendors receiving up to Rs 1 lakh a month via UPI QR codes — classified under a Person-to-Person-Merchant (P2PM) framework — will continue to pay zero MDR on all transactions, with no requirement to register for GST or upgrade existing QR infrastructure.
Acquiring banks will track inward payments via a velocity check, and merchants exceeding Rs 1 lakh a month for three consecutive months move into the standard P2M category. Zero MDR under this framework also extends to rural and semi-urban QR payments, an area the government has flagged as a core policy priority.
Overall, government data analysis suggests only about 4 per cent of merchant transactions will actually be touched by the new MDR, since most fall below the Rs 2,000 threshold or qualify for the P2PM exemption.
Officials argue merchants typically absorb such processing costs as a standard operational overhead, offset by higher transaction volumes.
Existing daily transaction limits of Rs 1-5 lakh, the government stressed, remain purely risk-management tools rather than a backdoor charge structure.
“UPI app providers are explicitly prohibited from levying platform fees or hidden charges,” the statement said. “Banks have been advised to ensure that merchants do not pass MDR charges to customers for UPI payments.”
There will be no monthly quotas, volume limits, or tiered caps on free UPI transactions for individuals.
“Daily transaction limits enforced by banks and NPCI (Rs 1-5 lakh depending on category) are purely risk-management measures, not commercial charge tiers,” it said.
Industry pressure to reintroduce charges has been building for years. The Payments Council of India — whose members include Airtel Payments Bank, Amazon Pay, Google Pay, Cashfree and Jio Payments Bank — wrote to the Prime Minister’s Office seeking reconsideration of zero MDR, while banks separately pushed for fees on merchants with annual turnover above Rs 40 lakh. The Reserve Bank of India and NPCI have also previously urged the government to revisit the policy.
RBI Governor Sanjay Malhotra, addressing the issue after a recent monetary policy announcement, said plainly that “someone has to pay the cost”, while noting that the final call on MDR rests with the government rather than the central bank.
The zero-MDR era coincided with UPI’s transformation into the backbone of Indian retail payments — the network processed 2,451 crore transactions worth Rs 29.9 lakh crore in August 2026 alone, according to the government — but it also left banks, payment service providers and fintech companies without a direct revenue stream from the system they built and maintained.
The government has plugged that gap since 2021 through a budgetary incentive scheme rather than merchant fees, but officials say that model has run its course: industry estimates put the annual cost of maintaining UPI’s operations, server bandwidth, fraud-prevention systems and bank technical support at around Rs 20,000 crore, a bill the government says fiscal allocations alone can no longer reliably cover.
Parliament’s Standing Committee on Finance, in its 32nd report, warned that the zero-MDR regime “puts pressure on government finances” and limits the ecosystem’s ability to invest in long-term infrastructure, urging that “establishing a viable revenue mechanism is critical to ensuring the UPI ecosystem achieves financial sustainability without perpetually straining the government exchequer”. The panel had flagged that the government was providing roughly Rs 2,000 crore a year to support the incentive scheme built around the zero-MDR policy. (PTI)
