Big Breaking: NPCI sets MDR on UPI transactions above Rs 2,000 at 0.4%

In a significant move, the National Payments Corporation of India (NPCI) has issued a notification to the payments ecosystem on merchant discount rate (MDR) on UPI transactions. The UPI ecosystem is set to introduce a MDR on select high-value merchant transactions, effective October 15, 2026.

Under the revised framework, an MDR of 0.4% will apply to UPI person-to-merchant (P2M) transactions above Rs 2,000, with the fee capped at Rs 300 per transaction, according to details reviewed by The Head and Tale.

According to a NPCI circular, seen by The Head and Tale, here is how the split will be: 

The MDR to be paid: 

Merchant to the acquiring bank: 0.4%

Of the 0.4%, acquiring bank will pass on the interchange to the issuer: 0.28%

Now, out of that 0.28%, the issuer will pass on the payer PSP (Payment Service Provider): 0.12%

And, then the payer PSP will keep its share from 0.12% and pass on the rest to app provider fee: 0.08%.

So, the split is: Acquiring Bank earns 0.12%; issuing bank makes 0.16%; payer PSP makes 0.04%; and UPI apps (TPAPs) gets 0.08%.

"In cases where the merchant is acquired by an authorized payment aggregator, the acquiring bank's share of MDR shall be distributed between the acquiring or sponsored bank and the PA in accordance with the terms of their business agreement," the circular said.

"UPI app providers (also known as TPAPs) shall not charge platform fee or any other charge for any payment made through UPI."

MDR applicable to the capital market transactions such as mutual funds, securities, brokers and dealers shall be 0.02% of the transaction value, subject to cap of Rs 300.

The move, however, will not affect UPI payments of up to Rs 2,000 will continue to remain free for consumers and merchants.  According to the framework, such low-value transactions account for more than 95% of all UPI P2M transactions.

The framework also proposes a flat Rs 5 MDR on UPI transactions above Rs 2,000 for specified merchant categories, including railways, telecom services, insurance and fuel.

The introduction of MDR comes as the payments ecosystem looks to create a more sustainable economic model around merchant payments, while continuing to protect the zero-cost proposition for consumers and small-value transactions.

Importantly, the framework proposes that the MDR collected on high-value transactions will be distributed among players across the UPI ecosystem. The funds are expected to support expansion of UPI acceptance, investments in resilience and cybersecurity, and innovation across the payments infrastructure.

The revised framework also retains zero MDR for small merchants operating under the Person-to-Person Merchant (P2PM) framework.

The category covers small vendors receiving up to Rs 1 lakh per month through UPI QR payments directly into their bank accounts. The continued zero-MDR treatment is aimed at ensuring that the introduction of charges on higher-value transactions does not undermine UPI adoption among India's un-organized retail sector.

In addition, a dedicated fund for small merchants is proposed to support digital payment infrastructure among existing merchants as well as in Tier 3 and smaller markets.

This could provide a new avenue for expanding UPI acceptance beyond the country's larger cities, where QR-based payments have already become ubiquitous.

The revised MDR structure could also alter the economics of UPI for banks, payment aggregators and other ecosystem participants.

For years, the absence of MDR on UPI merchant transactions has meant that payment players have had limited direct revenue from processing the country's largest retail digital-payment rail. The new framework creates a revenue pool from higher-value transactions while ring-fencing small-value payments.

The Rs 300 cap also places a ceiling on the MDR burden for larger-ticket transactions. At 0.4%, the MDR would otherwise rise proportionately with transaction value.

The framework also positions the revised UPI MDR as remaining below the charges associated with several alternative digital payment instruments, including credit cards, debit cards and wallets.

The development comes at a time when UPI has moved well beyond its initial role as a low-value retail payment mechanism and is increasingly being used for larger merchant transactions across sectors.