New rules regarding UPI merchant transactions have raised questions about whether users will have to pay for digital payments. The government has clarified that person-to-person (P2P) UPI transactions will remain completely free, and merchant payments of up to ₹2,000 will continue to be exempt from the Merchant Discount Rate (MDR).
The new framework will apply to specific merchant transactions exceeding ₹2,000. However, the government stated that approximately 96 percent of merchant transactions will remain unaffected.
The rules also clarify that the MDR—or Merchant Discount Rate—is not a charge levied on customers. It is a charge within the payment ecosystem and is shared among the participating entities, such as banks, payment service providers, and UPI application providers.
So, what exactly will change under the new framework? Which transactions will attract MDR? Will customers have to pay more? And have the UPI transaction limits changed?
What Will Remain Free on UPI?
All person-to-person (P2P) UPI transactions will remain completely free, regardless of the transfer amount. In a statement, the Ministry of Finance said that no transaction fees, platform fees, or other charges can be levied on individuals for sending or receiving money via UPI.
P2P transactions account for approximately 70 percent of the total UPI transaction value and will remain outside the scope of the MDR framework.
The statement also noted that merchant payments of up to ₹2,000 will remain exempt from MDR. Small merchants—including street vendors and neighborhood shops—who receive up to ₹1 lakh per month via UPI QR codes under the Person-to-Person-Merchant (P2PM) category will continue to enjoy zero MDR on all transactions.
Which UPI transactions will attract MDR?
A nominal MDR of 0.4% will apply to specific Person-to-Merchant transactions exceeding ₹2,000. For transactions of ₹75,000 and above, the MDR will be capped at ₹300 per transaction.
In its statement, the Ministry noted that the MDR would be shared among entities within the payment ecosystem—such as banks, payment service providers, and UPI application providers.
Will customers have to pay MDR? No. The government has clarified that customers making UPI payments will not be charged any MDR. Banks have been instructed to ensure that merchants do not pass the MDR cost on to customers. UPI application providers have also been prohibited from levying platform fees or hidden charges.
For the general public, the use of UPI will remain unlimited and free; there will be no monthly quotas, volume caps, or tiered limits on free transactions.
What about essential services?
A flat MDR structure will apply to certain essential and low-margin sectors. For merchant transactions exceeding ₹2,000 in sectors such as railways, telecom, insurance, fuel, and agricultural supplies, a flat MDR of ₹5 per transaction will be charged.
The government stated that the objective of this flat charge is to provide cost certainty for essential public services and businesses operating on low margins.
What is the MDR for capital market transactions? Payments related to mutual funds, securities, stockbrokers, and dealers will attract an MDR of 0.02%, capped at ₹300 per transaction. The lower rate aims to sustain public participation in formal financial markets.
How many merchant transactions will be affected?
According to the government, the MDR will apply to only about 4% of merchant transactions.
This means that approximately 96% of merchant transactions will remain unaffected—either because they fall below the ₹2,000 threshold or because they fall under the zero-MDR framework for small merchants.
Has the UPI transaction limit changed?
The daily transaction limits set by banks and the NPCI are distinct from the MDR framework. These limits serve as security and risk-management measures, typically ranging from ₹1 lakh to ₹5 lakh depending on the transaction category; they are not limits related to the imposition of charges.
In other words, the prescribed daily transaction limit does not determine whether or not MDR applies to a payment.
Why has the new framework been introduced?
This framework has been introduced under the Payment and Settlement Systems Act, 2007, following discussions by the UPI Steering Committee.
The government stated that the framework aims to ensure the long-term sustainability of UPI while keeping payments free for the general public and protecting small merchants from additional costs. The government clarified that MDR is not a customer-facing charge and that the daily UPI transaction limits set by banks and the NPCI should not be confused with the MDR threshold.