UPI MDR explained: New fees, exemptions and what it means

Using a mobile phone to scan a QR code and make a payment has become a routine part of daily life in India, driven by the country’s homegrown Unified Payments Interface (UPI).

After six years of free use, India is set to introduce a Merchant Discount Rate (MDR) of 0.4 per cent on merchant transactions above Rs 2,000, with some exclusions. Person-to-person transfers will remain free.

The move has already affected investor sentiment. Shares of Indian payment firms rose on Wednesday as investors viewed the MDR as opening new revenue streams for banks and payment firms that have so far absorbed the cost of UPI transactions.

How big is UPI?

UPI processed 24.5 billion transactions worth Rs 29,823 billion in August, according to official data.

The platform had more than 550 million users in the month.

The government said on Tuesday that UPI accounts for 84 per cent of India’s digital payments by volume and 49 per cent of global real-time payment volumes.

UPI fee rules from October 15: Who pays, how much and what stays free

Walmart’s PhonePe and Alphabet’s Google Pay together had about 80 per cent of the UPI transaction market by value in August.

Was UPI always free?

UPI’s pricing model when it launched in 2016 included nominal charges.

Those charges were temporarily waived in 2017, when India demonetised a large chunk of its high-denomination currency notes.

In 2020, all charges were scrapped, leading to the zero-MDR regime that is set to end on October 15, 2026.

What fee will be imposed?

A 40 basis point fee, equivalent to 0.4 per cent, will apply to merchant transactions above Rs 2,000.

There will be carve-outs for payments to small merchants and merchants operating in rural or semi-urban areas.

Some widely used categories, including telecom, railways and mutual fund or stock investments, will attract lower charges.

The fee will be capped at Rs 300 on transactions exceeding Rs 75,000.

Will consumers pay the fee?

The National Payment Corporation has said merchants cannot directly pass the fee on to consumers.

However, critics fear merchants could eventually pass the cost on to customers.

Merchants pay the fee to banks that process the transactions. A portion is also passed on to payment apps such as Google Pay and PhonePe, which facilitate the payments.

What criticism does the move face?

India’s opposition party, Congress, has criticised the government’s decision.

Opposition leader Rahul Gandhi said the fees will increase the burden on consumers as merchants pass on the cost.

Social media users have also raised concerns that the change could encourage merchants to prefer cash payments.

Some have questioned the rationale for charging for the use of what the government has previously described as “digital public infrastructure.”

Why does UPI need an MDR?

The Indian government, the central bank and the payments authority have said the MDR will help make UPI self-sustainable.

They have also said it will support the expansion of UPI in rural and semi-urban areas, while keeping a large majority of payments free of charge.

What changes from October 15?

• Merchant transactions above Rs 2,000: 0.4 per cent MDR.
• Person-to-person transfers: Remain free.
• Small merchants: Certain carve-outs apply.
• Rural and semi-urban merchants: Certain carve-outs apply.
• Telecom, railways, mutual fund and stock investments: Lower charges.
• Transactions above Rs 75,000: Fee capped at Rs 300.
• Consumers: Merchants cannot directly pass the fee on to consumers, according to the National Payment Corporation.
• Zero-MDR regime: Ends on October 15, 2026.

(With inputs from Reuters)