UPI 0.4% Charges: What the New MDR Rule Means in 2026

India's Unified Payments Interface (UPI) has operated for years without a direct transaction charge for consumers, helping digital payments become part of everyday life. That model is changing for some merchant transactions from October 15, 2026, when a new Merchant Discount Rate (MDR) framework comes into effect.

Under the new framework, an MDR of 0.4% will apply to specified UPI person-to-merchant (P2M) transactions above ₹2,000. However, this does not mean that every UPI user will suddenly pay 0.4% whenever they scan a QR code or transfer money.

Person-to-person (P2P) transactions remain free, and UPI payments to merchants up to ₹2,000 remain free of MDR. Small merchants meeting the specified eligibility conditions are also protected by a zero-MDR provision. The distinction between UPI charges, MDR, merchant payments and consumer payments is therefore important.

What Is the New 0.4% UPI Charge?

The 0.4% rate is a Merchant Discount Rate, or MDR. It is a fee associated with eligible merchant transactions rather than a direct charge imposed on consumers for using UPI.

From October 15, 2026, eligible merchant transactions above ₹2,000 will attract an MDR of 0.4%.

For example, if an eligible merchant receives a ₹10,000 UPI payment, 0.4% of the transaction value is ₹40.

Is 0.4% a Charge on UPI Users?

No.

The new MDR framework does not introduce a 0.4% fee on every UPI payment made by individuals.

A person transferring ₹5,000 to a friend through UPI will continue to be able to make that P2P transaction without MDR.

Similarly, a customer making an eligible merchant payment of ₹2,000 or less will not incur the standard 0.4% MDR.

Who Pays the MDR?

The MDR applies within the merchant payment ecosystem. According to the government, it is not a tax collected directly by the government or NPCI.

The MDR is distributed among relevant participants in the payment ecosystem, including banks and payment service providers, according to the applicable framework.

When Will the New UPI MDR Start?

The new MDR framework is scheduled to apply from October 15, 2026.

This means the existing experience of making UPI payments should not be interpreted as evidence that every UPI transaction will remain outside the MDR framework indefinitely.

The important date for the new rules is October 15, 2026.

What Payments Remain Free?

Several categories remain outside the standard 0.4% MDR.

Person-to-Person UPI Payments

All P2P UPI transactions remain free, regardless of the amount transferred.

For example:

• ₹500 sent to a friend — free

• ₹5,000 sent to a family member — free

• ₹50,000 transferred to another individual — free

The new MDR framework does not apply to these P2P payments.

Merchant Payments Up to ₹2,000

UPI payments to merchants up to ₹2,000 remain free of MDR.

This covers many everyday transactions, including ordinary low-value purchases.

Small Merchants

Small merchants receiving up to ₹1 lakh per month through UPI QR codes under the specified P2PM category continue to receive zero-MDR treatment.

This provision is particularly relevant for small businesses such as neighbourhood shops and street vendors that fall within the defined eligibility criteria.

How Does the 0.4% MDR Work?

The basic calculation is straightforward:

MDR = Eligible transaction amount × 0.4%

For an eligible ₹10,000 merchant transaction:

₹10,000 × 0.4% = ₹40

For an eligible ₹20,000 transaction:

₹20,000 × 0.4% = ₹80

MDR Cap for Large Transactions

The standard 0.4% MDR is capped at ₹300 per transaction for transactions of ₹75,000 and above.

This means the MDR does not continue increasing indefinitely as the transaction value rises.

For example, 0.4% of ₹75,000 is ₹300. A larger eligible transaction will still be subject to the applicable ₹300 cap under the standard framework.

Special UPI MDR Rates and Categories

The new framework does not use the same rate for every type of merchant transaction.

Essential and Thin-Margin Sectors

Specified transactions above ₹2,000 in certain sectors, including areas such as railways, telecommunications, insurance, fuel and agricultural inputs, are subject to a flat ₹5 MDR rather than the standard 0.4% rate.

This creates a different cost structure for businesses operating in specified essential or thin-margin categories.

Capital Market Transactions

Certain capital-market transactions, including payments involving mutual funds, securities, stockbrokers and dealers, have a separate MDR structure.

The applicable rate is 0.02%, with a maximum MDR of ₹300 per transaction.

Therefore, it is inaccurate to describe the new framework simply as "0.4% on all UPI payments above ₹2,000."

Practical Examples of the New UPI Charges

Understanding the difference between P2P, P2M, small merchants and special categories makes the new framework easier to understand.

Example 1: Sending Money to a Friend

You send ₹10,000 to a friend using UPI.

MDR: ₹0

This is a P2P transaction and remains free.

Example 2: Paying a Large Retailer ₹10,000

You purchase a product worth ₹10,000 from an eligible merchant.

The standard MDR calculation is:

₹10,000 × 0.4% = ₹40

The applicable MDR is therefore ₹40 within the merchant payment ecosystem.

The customer is not supposed to be charged an additional 0.4% as a UPI transaction fee.

Example 3: Paying a Merchant ₹2,000

You pay an eligible merchant ₹2,000 using UPI.

Because the transaction is at or below the ₹2,000 threshold:

MDR: ₹0

Example 4: Paying ₹20,000 to an Eligible Merchant

For an eligible merchant transaction of ₹20,000:

₹20,000 × 0.4% = ₹80

The applicable standard MDR is ₹80.

Example 5: Paying ₹1,00,000

For an eligible standard merchant transaction of ₹1,00,000:

0.4% would mathematically equal ₹400.

However, the framework caps the MDR at ₹300 for transactions of ₹75,000 and above.

Therefore:

Applicable MDR: ₹300

Example 6: Buying Fuel Above ₹2,000

Specified transactions in sectors such as fuel have a special arrangement.

Where the transaction falls within the specified category, the applicable MDR is a flat ₹5, rather than 0.4%.

This is why the transaction category matters as much as the transaction amount.

Benefits of the New UPI MDR Framework

The new framework is designed around the economics of maintaining a large-scale digital payments ecosystem.

Supporting UPI Infrastructure

UPI operates at enormous scale. NPCI data shows that UPI processed approximately 24.51 billion transactions worth ₹29.82 lakh crore in August 2026.

Running payment infrastructure at this scale involves banks, payment service providers, technology systems, cybersecurity, fraud monitoring and network infrastructure.

A merchant-side MDR provides a mechanism for eligible commercial transactions to contribute to the cost of that ecosystem.

Protecting Small Merchants

The framework does not apply the standard MDR uniformly to all merchants.

Small merchants meeting the specified criteria can continue to receive payments without MDR.

This is significant because small businesses often operate with tighter margins than larger businesses.

Protecting Low-Value Transactions

Merchant payments of ₹2,000 or less remain outside the standard 0.4% MDR.

This means many everyday UPI purchases remain unaffected by the standard MDR.

Keeping P2P Transfers Free

Individuals can continue using UPI for person-to-person transfers without MDR.

This preserves UPI's role for common activities such as sending money to family members, friends or other individuals.

UPI 0.4% Charges vs the Previous Zero-MDR Model

The key difference between the earlier model and the new framework is the treatment of specified commercial transactions.

The important takeaway is that the new framework is not a universal UPI fee. It introduces MDR for specified commercial transactions while preserving zero-MDR treatment across several important categories.

Will Customers Have to Pay More for UPI?

The government has stated that customers will not be charged MDR for making UPI payments.

This distinction matters because MDR is a merchant-side payment ecosystem charge.

However, the economic effect on businesses and prices is a separate question. A merchant may have different ways of managing an additional business cost, but the government has specifically stated that MDR should not be passed on to customers as a separate UPI surcharge.

Therefore, customers should distinguish between:

1. A UPI transaction fee charged directly to the customer.

2. MDR applicable within the merchant payment ecosystem.

3. Any broader pricing decision made by a business.

These are not the same thing.

Why Was UPI Free Before?

UPI's zero-MDR model was part of India's strategy to encourage digital payments.

The government supported the ecosystem through incentive schemes. According to government information, incentive support for UPI and RuPay was provided over multiple financial years.

As UPI transaction volumes expanded significantly, questions about the long-term funding of the payment ecosystem became increasingly important.

The new MDR framework represents a shift toward having specified commercial transactions contribute toward the economics of operating the payment ecosystem.

What Does the New Rule Mean for Consumers?

For most consumers, the most important point is that UPI itself has not become a 0.4% consumer transaction fee.

If you send money to another person, the transaction remains free.

If you make a merchant payment of ₹2,000 or less, the standard MDR does not apply.

If you pay an eligible merchant more than ₹2,000, the merchant-side MDR framework may apply, but that does not mean the customer should automatically see an additional 0.4% charge on the bill.

Consumers should therefore be cautious about messages or social-media posts claiming that "UPI now has a 0.4% charge on every payment."

That description is incorrect.

What Does the New Rule Mean for Merchants?

Merchants need to understand whether their transactions fall into the standard MDR category, a special category or an exemption.

Larger merchants receiving eligible payments above ₹2,000 may see MDR deductions under the new framework.

Small merchants meeting the specified conditions remain protected by zero-MDR provisions.

Businesses should also review their payment-service-provider documentation because the actual settlement and reporting process can depend on the applicable payment arrangement.

Conclusion

The new UPI MDR framework changes how some merchant transactions are funded, but it does not mean that UPI has become a paid service for everyone.

From October 15, 2026, a standard 0.4% MDR will apply to specified merchant transactions above ₹2,000, subject to a ₹300 cap. At the same time, P2P transactions remain free, merchant payments up to ₹2,000 remain free, and eligible small merchants continue to receive zero-MDR treatment. Special rates also apply to specified essential sectors and capital-market transactions.

For consumers, the most important distinction is between a merchant-side MDR and a consumer transaction fee. Understanding that distinction helps avoid the misleading claim that every UPI payment will now cost 0.4%. The new framework is ultimately a change in the economics of selected commercial UPI transactions, while retaining free UPI access for individuals and protecting many low-value and small-merchant transactions.