Can merchants pass UPI charges to buyers? Key questions on MDR, its implementation answered

The announcement of a 0.4% Merchant Discount Rate (MDR) on UPI payments above ₹2,000 made to merchants has raised several questions on how the charges will work, who will bear them and can these be shifted on to consumers in any way.

The National Payments Corporation of India (NPCI) on Tuesday issued a clarification on the MDR – from the ₹2,000 threshold for merchant payments and fee caps. It further addressed queries on fuel purchases, utility bills, platform fees and person-to-person transactions.

Key questions on MDR and its implementation

Why the introduction of MDR now?

On the introduction of 0.4% MDR above transactions of ₹2,000, the NPCI said that UPI processes billions of transactions every month.

“The MDR is distributed only amongst the UPI ecosystem, to further invest into infrastructure resiliency, innovation, cybersecurity (protecting the UPI Infrastructure with banks and non-banks) and customer service,” the NPCI stated.

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However, it said the annual government incentive/ subsidy for UPI was designed as a “short-term bridge funding” rather than a permanent measure to compensate the cost incurred by the payment industry.

According to industry estimates, maintaining UPI payment operations, server bandwidth, fraud prevention systems, and bank technical support costs around ~ ₹20,000 crore annually. Relying solely on fiscal budget allocations creates funding uncertainty and limits long-term technology investments by banks and fintech, NPCI said.

When will the MDR charges take effect?

The finalised MDR framework and threshold structure will take effect from October 15, 2026, giving acquiring banks, payment aggregators, fintech applications, and corporate accounting platforms adequate lead time to update their software engines and billing systems.

Can merchants pass the MDR to the consumers?

While the charges are now being applied to merchants, there have been concerns about these being passed on the buyers.

However, the NPCI clarified that merchants on-boarded cannot pass on MDR charges to customers while accepting payments through UPI. It said the framework ensures that consumers pay “only the posted price.”

How will MDR be calculated for transactions?

The charging of MDR will follow a clear, predictable formula based on transaction value thresholds. For example, for a purchase of ₹3,000, applying the 0.4% rate results in an MDR fee of ₹12 paid by the merchant to its acquiring bank.

Similarly, for a ₹50,000 purchase, a 0.4% fee equals ₹200. However, for a a high-value purchase of ₹1,00,000, the 0.4% calculation (which equals ₹400) is superseded by the fixed maximum cap of ₹300 ( ₹300 is the fixed maximum cap per transaction for payments of ₹75,000 and above. Any transaction under ₹2,000 incurs no MDR.

How does the MDR charge in UPI compare to debit and credit cards?

UPI MDR is structured to be much lower than all traditional card-based transaction fees, according to NPCI. Standard credit card MDRs typically range from 1.5% to 2.5% per transaction, while debit card MDRs are capped up to 0.90%. However UPI MDR sets the baseline at 0.4% on transaction above ₹ 2,000 and caps it at ₹300 for high-value purchases.

The cost difference will help merchants lower their payment processing expenses while accepting digital transactions, NPCI said.

Who decides on the implementation and enforcement of UPI caps?

The final decision on the operational parameters, fee distribution models, and category caps is made by the UPI and Services Steering Committee, headed by NPCI.

Will consumers be charged platform fees or for person-to-person transactions?

P2P transactions will continue to be free-of-cost for both the payer and the beneficiary, and there will be no charges for any person transferring or receiving any amount to or from any other person using UPI.

Further, UPI app providers cannot charge Platform Fee or any other charge for any payment made through UPI.

What happens when small merchants receive payment above ₹2000?

Small merchants operating under the P2PM framework will continue with zero MDR, NPCI said. R. These are small vendors receiving up to ₹1 lac per month through UPI QR directly into their accounts.

Also Read | Govt says no UPI charges up to ₹2,000, Congress scoffs: Inside the digital wallet row

The Person-to-Person-Merchant (P2PM) framework is a specialized account category created by NPCI to support small vendors receiving payments directly into their own personal bank accounts. Under P2PM guidelines, small merchants receiving up to ₹1 lakh per month through UPI QR codes enjoy a mandatory zero-MDR.

Therefore, receiving a payment above ₹2,000 does not impose a charge on a small merchant operating under exempted tiers like P2PM. MDR applicability is determined by overall merchant account categorisation.

Which categories will qualify for a flat MDR instead of percentage rate?

For specific merchant categories such as railways, telecom services, insurance, and fuel among others, a flat MDR of ₹5 per transaction will be applicable for transaction above ₹2,000.

These will not be charged a 0.4% variable rate. These specific sectors pay a fixed fee of ₹5 regardless of the transaction amount, NPCI said.

Fuel purchases made at petrol stations via UPI qualify for the flat concessional rate of ₹5 for payments over ₹2,000. The flat ₹5 fee protects petrol pump operators from high processing fees on tank refills. For all fuel payments under ₹2,000, the MDR remains at 0%,