UPI will introduce a 0.4% MDR on eligible P2M transactions above ₹2,000 from October 15, 2026, ending its six-year zero-MDR regime.
The bigger shift is the ₹1 Lakh/month UPI receipt threshold for “small” merchants, potentially bringing many more small and mid-sized sellers into the MDR net.
The new fee could affect merchant margins, consumer pricing and fintech monetisation, while some businesses expect limited financial impact but higher operational complexity.
UPI is one of the cheapest ways for Indian merchants to collect digital payments. Now, the economics of India’s biggest digital payment rail is set to change from October 15.
After this date, under the new merchant discount rate (MDR) framework, banks and payment providers will charge 0.4% on UPI person-to-merchant (P2M) transactions above ₹2,000, capped at ₹300 for transactions of ₹75,000 and above.
The new regime exempts merchants receiving up to ₹1 Lakh a month through UPI QR codes.
Earlier, merchants with annual turnover between ₹1 Cr and ₹1.5 Cr according to media reports were expected to fall under the safe-harbour threshold.
If a merchant receives more than ₹1 lakh for three consecutive months, they will be moved to the standard P2M category and made liable for MDR. The rejig has pulled a much larger population of small and mid-sized sellers into the MDR net.
As per Bernstein estimates, a 40-basis-point MDR applied to roughly half of eligible transaction value could generate an annual revenue pool of about ₹22,000 Cr by FY28, with banks capturing the largest share at an estimated ₹14,000 Cr and third-party app providers (TPAPs) such as PhonePe, Google Pay and Paytm taking around ₹7,000 Cr.
As per the notified guidelines, the acquiring bank will pay 0.28% of the transaction value to the issuing bank as an interchange fee. The issuing bank will then pay 0.12% to the payer PSP bank, which will pass 0.08% to the third-party application provider (TPAP).
Let’s understand how this works with an example.
Say a customer buys groceries worth ₹2,500 from a store and pays through Paytm
. The customer’s Paytm account is linked to a bank, which acts as the issuing bank. The grocery store, meanwhile, has its own bank account for receiving UPI payments. That bank is the acquiring bank.
When the customer makes the payment, the acquiring bank charges the merchant an MDR of 0.4%, which works out to ₹10. This ₹10 is then distributed across the UPI payment chain.
Under the new framework, ₹7, or 0.28% of the transaction value, goes to the issuing bank. The remaining ₹3 stays with the acquiring bank.
The ₹7 received by the issuing bank is then distributed further. Besides this, ₹2, or 0.08% of the transaction value, goes to the TPAP, such as Paytm, PhonePe or Google Pay. The remaining ₹1, or 0.04% of the transaction value, goes to the PSP bank associated with the TPAP.
Small retailers and brands that Inc42 spoke with said the new MDR framework could affect businesses operating on thin margins.
The Retailers Association of India (RAI) has warned that the new MDR will affect digital payment adoption, especially among smaller retailers. The association has also pointed to the timing of the change, which comes as the festive season begins.
“Small merchants will now think twice about whether to accept cash or UPI. During the festive season, a large share of transactions crosses the ₹2,000 mark, and the moment a fee attaches itself to digital payment, cash becomes the path of least resistance,” said Kumar Rajagopalan, CEO of the retailers’ guild.
For ordinary bank-to-bank UPI payments, the association’s position is that the government, and not the merchants, should bear the cost, since it collects GST and gets a traceable transaction in return.
Rajagopalan said the RAI will raise this issue with NPCI and the finance ministry, pushing for a graded structure that separates transactions via credit-linked UPI, alongside incentives that keep small retailers inside the formal payment system.
RAI’s concern reflects across the startup ecosystem.
D2C, ecommerce and other businesses have banked heavily on digital payments adoption, supported by discounts and cashbacks offered by brands, platforms and payments apps. These businesses are now assessing how they can mitigate the additional cost from the MDR.
A key example is Agrosher, a Delhi-based agritech startup that sells farm machinery across North India. A majority of its transactions take place through UPI, with average ticket sizes typically ranging between ₹50,000 and ₹75,000.
“At our ticket size, even the capped fee affects equipment margins,” Agrosher founder said.
However, the bigger worry for the founder is what happens to the customer.
“If UPI stops being frictionless for large purchases, rural buyers may drift back towards net banking or physical cash deposits and withdrawals at a bank branch, undoing some of the convenience that pulled them onto digital payments in the first place, given that debit and credit cards carry their own charges too,” he added.
Sumit Goyal, D2C brand Ecosys’s co-founder, said more than 80% of its prepaid transactions already happen over UPI comfortably past the ₹1 lakh monthly threshold but the immediate MDR exposure looks limited for a simple reason: the brand’s highest-priced individual SKU is ₹1,999, just under the cutoff.
“At our current AOV, the immediate impact should not be very significant because a large portion of our transactions are below ₹2,00.But as our AOV increases and customers buy bundles, the impact will increase,” he said.
“Payment platforms and gateways can have their own commercial layers.So brands will have to look at the total cost of accepting each payment method rather than MDR in isolation. For now, he said, there’s no plan to change product pricing.The first step is understanding the impact as AOV and volumes grow, since “every incremental cost — whether logistics, payment processing, marketplace commissions or advertising eventually becomes part of a brand’s unit economics,” Ecosys’s co-founder added.
However, not every merchant expects the MDR to have a significant impact on margins. For some businesses, the larger change could be operational.
Sunbeam Ventures, an importer, marketer and distributor of global consumer and fast-moving consumer goods, analysed its transaction mix and found that 96.3% of its UPI transactions were ₹2,000 or below. Applying the 0.4% MDR only to that portion works out to roughly 0.06% of total UPI collections.
“At the current transaction mix, the impact on our overall margins is quite limited and something we can absorb as a payment-processing cost. The bigger lift is operational, segregating transactions above and below ₹2,000 for reconciliation, and updating internal reporting that has always treated UPI as a zero-cost rail — rather than financial,” said Vikash Singhal, director, Sunbeam Ventures.
Echoing the NPCI’s statements on the MDR charges, the fintech industry has framed this move as a necessary step to ensure the sustainability of UPI transactions at scale and improve the innovations on top of it.
MobiKwik CEO Bipin Preet Singh argued that UPI has never actually been free and that it has been running on an ecosystem of banks, fintechs and NPCI, with the government’s incentive scheme funded directly by taxpayers.
“Moving to a market-linked pricing mechanism removes this tax burden and directly links the cost to large businesses, which benefit from UPI,” he added.
Paytm CEO Vijay Shekhar Sharma reportedly described the MDR framework as a “Robin Hood” move by the government. He said the rules were designed to place most of the cost on bigger shops, large retailers and ecommerce companies rather than small merchants and shopkeepers, while supporting the long-term sustainability of UPI.
The new MDR framework also creates a new revenue stream for payment companies that have thus far operated under the zero-MDR model.
According to PhiCommerce’s CEO Rajesh Londhe, the prescribed MDR split finally creates a real revenue pool around the payments rail that had become critical infrastructure even without a monetisation mechanism attached.
On the still-unresolved compliance question of who tracks a merchant’s position relative to the ₹1 Lakh threshold, he argues that the burden should sit with platforms, not the merchant.
“Good payments infrastructure should simplify compliance and reconciliation, not create another operational burden for merchants,” the PhiCommerce CEO said.
Finally, let’s address the elephant in the room: will the MDR charged to merchants eventually make its way to consumers?
An athleisure brand owner in Surat believes that customers will foot the bill eventually.
He gave the example of a business that receives ₹1 Cr a month through UPI. At a 0.4% MDR, that would mean a monthly cost of ₹40,000, or nearly ₹5 Lakh a year. For a business operating on thin margins, that could be difficult to absorb.
“Here they will have no choice other than to pass on that 0.4-0.5% to the consumer. If there are five or six similar players, this can easily add 3-4% to the cost being passed on to the consumer as a new price,” he said.
PhiCommerce’s Londhe, however, has a different take. “Businesses may occasionally try to recover operating costs through pricing, but that is different from a UPI convenience fee. In other words, no merchant can add an explicit UPI surcharge at checkout, but nothing stops the same cost from being folded into a general price increase later,” he said.
There is another variable in the equation.
Retailers and brands already pay payment aggregators and platforms various charges under commercial agreements. It remains to be seen whether payment companies will revisit these arrangements to account for the additional MDR burden on merchants.
With that said, the new MDR regime creates a new revenue pool for the UPI ecosystem, but the burden of who bears that cost remains unclear.
[Edited By Nikhil Subramaniam]
Source: Inc42
