Centre introduces 0.4% MDR on UPI payments above ₹2,000 made to merchants

The Union Government has announced a new fee structure for UPI transactions, with a 0.4 per cent Merchant Discount Rate (MDR) to be levied on person-to-merchant (P2M) payments above ₹2,000 from October 15.

However, consumers will not have to pay the charge. The government has clarified that the MDR will be collected within the merchant payment ecosystem and that person-to-person (P2P) transfers will remain completely free.

"Customers will not be required to pay any charge when making such payments through UPI," the Finance Ministry said in a statement. It added that "MDR is a charge within the merchant payment ecosystem. It is not a charge on customers making UPI payments."

Under the new structure, a 0.4 per cent MDR will apply to P2M transactions above ₹2,000. The charge will be capped at ₹300 for transactions worth ₹75,000 or more.

The move marks a significant change for UPI, which has operated without an MDR on most transactions for nearly six years. The government said the new framework is aimed at strengthening investment in UPI infrastructure, cybersecurity, innovation and customer service.

Essential and low-margin sectors, including railways, telecom, insurance, fuel and agricultural inputs, will be charged a flat MDR of ₹5 for transactions above ₹2,000.

These sectors account for nearly 17 per cent of P2M transaction volume but around 46 per cent of its transaction value, according to the government.

The ₹5 flat fee will also apply to government utility bill payments for electricity, water and piped gas, as well as educational fee payments such as school and university tuition, when the transaction value exceeds ₹2,000. Payments below the threshold will remain free.

Transactions involving mutual funds, securities, stockbrokers and dealers will attract a lower MDR of 0.02 per cent, capped at ₹300. The government said the lower rate is intended to keep the cost of digital investing low and encourage greater participation in formal financial markets.

Person-to-person UPI transfers will continue to attract zero charges regardless of the transaction amount. P2P payments account for 37 per cent of UPI's transaction volume and 70 per cent of its transaction value.

Small-value merchant payments of up to ₹2,000, which account for more than 95 per cent of total P2M transaction volume, will also remain unaffected.

The National Payments Corporation of India (NPCI) said the MDR collected under the new framework would be distributed among the entities facilitating the transactions. The funds will support investments in infrastructure resilience, innovation, cybersecurity and customer service.

The government has also sought to prevent merchants from passing the cost on to customers. UPI app providers will not be permitted to levy platform fees or hidden charges, while banks have been directed to ensure that merchants do not recover MDR costs from consumers.
(With PTI inputs)