The National Payments Corporation of India (NPCI) has introduced a 0.4% Merchant Discount Rate (MDR) on select person-to-merchant (P2M) UPI transactions, effective October 15, 2026. According to NPCI's latest circular, this represents a significant shift from the previous zero-MDR regime that has been in place for years. Payments above ₹2,000 will attract the standard 0.4% MDR, with a cap of ₹300 for transactions of ₹75,000 and above. The government has explicitly stated that UPI app providers cannot pass this charge on to shoppers as a platform fee or hidden charge, ensuring businesses continue showing the same price to customers regardless of payment mode. A customer paying ₹3,000 via UPI would mean an MDR of ₹12 (0.4% of ₹3,000), while a ₹50,000 payment would carry an MDR of ₹200. Payments up to ₹2,000 continue to carry zero MDR, with this bracket covering the large majority of P2M UPI transaction volume.
Essential sectors including railways, telecom, insurance, fuel, and agriculture inputs will have a flat ₹5 MDR for transactions above ₹2,000, as these categories make up close to 17% of P2M UPI volume and around 46% of P2M value. Small merchants with monthly UPI QR receipts under ₹1 lakh remain exempt from the new MDR structure. Small P2PM merchants continue to receive UPI payments at zero MDR, as long as total monthly UPI QR receipts stay within ₹1 lakh. Capital market transactions including mutual funds, securities, brokers, and dealers will have a lower 0.02% rate, capped at ₹300 to support retail investing. A single payment above ₹2,000 does not automatically move you out of the exempt category, with acquiring banks and payment service providers expected to monitor account activity over time before shifting merchants to the standard P2M category. Merchants must update their reconciliation processes to account for MDR deductions and cannot pass these charges to customers as surcharges or platform fees.
The government is considering discontinuing subsidies for low-value Unified Payments Interface transactions following the introduction of merchant discount rate (MDR) on larger UPI payments, according to reports from The Economic Times. This strategic shift aims to move the payment ecosystem away from taxpayer-funded subsidies as banks and payment companies begin earning transaction-linked revenue from the network. No fresh subsidy has been paid for transactions undertaken since April 2025, marking a significant change in the government's approach to digital payment incentives. The new MDR framework represents a natural evolution in the payment ecosystem's revenue model, with NPCI arguing that relying entirely on annual government incentive payouts isn't a durable funding model. Multiple analysts covering the announcement have estimated a rough revenue split, though this hasn't been confirmed as an official, binding formula: broadly, a majority share flowing to issuing and acquiring banks, a portion to UPI app providers, and a smaller share to non-bank payment aggregators.
Despite the discontinuation of fresh subsidies, the Centre has budgeted ₹2,000 crore for incentives on UPI and RuPay transactions in FY27, as reported by The Economic Times. However, this allocation represents a substantial reduction from previous years, with government UPI incentive disbursements falling sharply to ₹1,046 crore in FY25 from ₹3,631 crore in FY24. The government's decision reflects a broader strategy to reduce taxpayer burden while maintaining support for digital payment adoption. Part of the MDR collections (5% of total MDR revenue) is earmarked for a dedicated fund to expand UPI adoption among small merchants, particularly in Tier 3 to Tier 6 towns, the Northeast, Jammu & Kashmir, and Ladakh, with detailed structure expected to be finalised with the Reserve Bank of India within three months. The detailed structure of the small merchant support fund is expected to be finalised with the Reserve Bank of India within three months, aligning with a recommendation from Parliament's Standing Committee on Finance for a viable, long-term revenue mechanism to keep UPI financially sustainable.
Existing QR codes and soundboxes will continue working as-is, with no infrastructure swap required due to this MDR change. In August 2026 alone, UPI processed roughly 2,451 crore transactions worth about ₹29.9 lakh crore, highlighting the scale of operations that requires sustainable funding. Merchants must update their reconciliation processes to account for MDR deductions and cannot pass these charges to customers as surcharges or platform fees. The detailed structure of the small merchant support fund is expected to be finalised with the Reserve Bank of India within three months, with the RBI-NPCI framework potentially being directly relevant to small and growing businesses. Because exact deduction mechanics, timing, and reporting formats can vary by acquiring bank and payment aggregator, it's worth confirming directly with your payment gateway or banking partner how the MDR will appear in your settlement files and dashboards. For merchants building or maintaining custom checkout integrations, it's worth reviewing how the new UPI MDR slabs intersect with your specific transaction mix, as pricing, eligibility, and settlement details can vary by merchant category and approval.
