UPI stays free for P2P and 96% of merchant payments; MDR only above ₹2,000

The new UPI MDR framework: what happened?

UPI has been free for users. The new framework, meant to keep UPI running in the long term, lets a small fee be charged on larger shop payments, paid by the merchant, while keeping payments between people and small shops free. The release was issued to clear up confusion about who pays.

• All person-to-person (P2P) UPI payments remain free, whatever the amount; these are 70 per cent of total UPI transaction value.
• Person-to-merchant (P2M) payments up to ₹2,000 remain free of MDR.
• Small merchants, such as street vendors, receiving up to ₹1 lakh a month on P2PM QR codes keep zero MDR.
• MDR of 0.4 per cent applies only to P2M payments above ₹2,000; for ₹75,000 and above it is capped at ₹300.
• Railways, telecom, insurance, fuel and agricultural inputs above ₹2,000: flat ₹5 per transaction. Mutual funds and securities: 0.02 per cent, capped at ₹300.

What is MDR and who pays it?

• MDR (merchant discount rate) is a charge in the merchant payment chain, not a charge on the customer.
• It is not a tax, and it is not collected by the Government or NPCI.
• It is shared among banks, payment service providers and UPI apps.
• Banks have been told to make sure merchants do not pass it on to customers; UPI apps cannot charge platform fees or hidden charges.

Who decided the framework?

• It was introduced under the Payment and Settlement Systems Act, 2007.
• The UPI Steering Committee discussed the rates, operating rules and consumer safeguards.
• It matches the Standing Committee on Finance’s 32nd Report, which stressed a viable revenue model.

What will a payment cost under the new UPI rules?

MDR is paid within the merchant chain, not by the customer.

How does the fee money flow?

1. Customer pays a merchant more than ₹2,000 by UPI
2. Merchant’s side bears the MDR (customer pays nothing extra)
3. MDR is shared by banks, payment providers and UPI apps
4. 5% of total MDR goes to a fund for small-merchant UPI adoption

Why does the new UPI MDR framework matter?

What are the challenges in the new UPI MDR framework?

• Merchants may try to pass the charge on to customers despite the rule; enforcement will matter.
• Some merchants may push customers to cash or split payments to stay under ₹2,000.
• Daily bank limits (₹1 lakh to ₹5 lakh) are often confused with charging thresholds.
• Only about 4 per cent of merchant transactions pay MDR, so revenue may be modest.

What should be done next on the new UPI MDR framework?

• Clear public messaging that customers do not pay MDR.
• Watch for merchants passing on charges and act on complaints.
• Use the small-merchant fund to widen UPI acceptance.

What can Prelims ask on the new UPI MDR framework?

• UPI P2P payments: free at any amount.
• MDR: 0.4% on P2M above ₹2,000; capped at ₹300 for ₹75,000 and above.
• Essential sectors (railways, telecom, insurance, fuel, agricultural inputs): flat ₹5.
• Law: Payment and Settlement Systems Act, 2007.
• 5% of MDR collections go to a fund for small-merchant UPI adoption.

How to write about the new UPI MDR framework in Mains

Practice question (10 marks, 150 words): “Free UPI for citizens, fair revenue for the system.” Examine the new UPI merchant discount rate framework in this light.

• Intro: framework clarified on 15 September 2026; PSS Act, 2007.
• What stays free: P2P, P2M up to ₹2,000, small merchants.
• What is charged: 0.4% above ₹2,000; ₹5 essentials; 0.02% markets.
• Concerns: pass-through to customers, cash shift, enforcement.
• Conclusion: balance between access and sustainability.