Govt Confirms UPI Fee on Big Merchant Payments; Payments upto ₹2,000 Free

Synopsis

National Payments Corporation of India has announced a new Merchant Discount Rate (MDR) for person to merchant transactions on UPI above ₹2,000 effective from October 15, 2026. The government states the fee is not being imposed on the consumers and that small merchants and person-to-person transfers will be exempt. The shift will put an end to the fee-free regime, which was in place since 2020, and was to be used to cover UPI's growing infrastructure and cyber security expenses.

Government Notifies New UPI Merchant Charge

The digital payments infrastructure that India is riding on will see its first structural price change in six years. The National Payments Corporation of India (NPCI) released a circular on 15th September 2026 announcing a new Merchant Discount Rate (MDR) for person-to-merchant (P2M) UPI transactions above ₹2,000 from 15th October 2026.

The announcement comes on the back of an amendment passed by Parliament in August 2026. The Government has said that once the Taxation and Other Laws (Amendment) Bill 2026, which amends the Payment and Settlement Systems Act 2007, is passed, it would be the UPI and Services Steering Committee led by NPCI that would chalk out the framework for MDR.

For whom is the bill more expensive and for how much?

Authorities have warned repeatedly that consumers " everyday life is protected. The new MDR is not a fee that the customer has to pay while paying via UPI, person-to-person transfers are also free from it and up to ₹ 2000, payment to merchants is also not subject to MDR. The government has announced that approximately 96% of merchant UPI transactions will not be impacted.

The fee gradually increases with the transaction value (for transactions over a certain amount). For a standard Person-to-Merchant transaction of more than ₹2,000, the MDR will be 0.4%, up to a maximum of ₹300 per transaction for any transaction amount exceeding ₹75,000.

Small merchants, under Person-to-Person-Merchant (P2P-M) will continue to receive the same zero MDR, while UPI fuel transactions will continue to enjoy a flat concessional MDR rate of ₹5 for payments above ₹2000. What they exactly mean when you pay ₹5,000, ₹50,000 or ₹1 lakh in UPI?

Most importantly, the cost is not transferable downstream. According to the NPCI's FAQ, merchants can't charge the MDR through to customers; they still charge what they have listed on their screen.

God created Adam and Eve, and the free ride is over

The era of zero MDR for UPI started during the pandemic. The Payment and Settlement Systems Act had been amended by Parliament to allow free transactions with UPI and RuPay debit card, with the banks getting compensated through incentives by the government, annually.

The scale that has been achieved since then has been off the charts: UPI had handled 24.51 billion transactions worth ₹29.8 lakh crore in August 2026 alone, which translates to almost 800 million transactions per day.

However, the level of subsidies never equalled the cost of operating the system. Estimates showed infrastructure cost, server cost, fraud detection and settlement cost at about ₹20,000 crore, per annum, while the maximum outgo for government was at ₹3,631 crore per annum in FY2023-24, which fell to the Budget Estimate of just ₹437 crore for FY2025-26.

According to the NPCI framework, Merchant Discount Rate (MDR) refers to the fee when making a digital payment, and a separate fund to support small merchants' onboarding would be funded by a portion of collections. A special fund will be established to encourage the adoption of UPI by small merchants and it will be funded from 5% of total MDR collection.

Outlook

Banks, payment aggregators and merchant groups are expected to complete the compliance process by October 15, four weeks before implementation. The analysts will be closely observing whether the new revenue stream is able to help UPI's cost base stabilize and will not impact India's outstanding digital payments adoption.