Small merchants can now check their account classification before October 15 to determine whether the new UPI MDR rules apply to them. According to Business Standard, the Person-to-Person-Merchant (P2PM) framework provides zero MDR protection for small vendors receiving up to ₹1 lakh per month through UPI QR codes, even if individual payments exceed ₹2,000. The classification is handled through the merchant's bank or payment service provider, with no GST registration required to qualify for zero MDR. For example, if a small shopkeeper receives ₹90,000 in the first month, ₹1.05 lakh in the second month, and ₹1.10 lakh in the third month, the three-month migration condition has not been met, and the merchant remains in the P2PM category.
According to industry executives, large merchants such as big retail chains and restaurants are likely to absorb the MDR cost in a competitive market instead of passing it on to consumers. As per The Times of India, an executive with a top electronics retailer noted that large retailers can afford to bear the cost and the overall business impact should not be much, though it will weigh on bottom-lines. The retailer pointed out that credit cards always carried a charge, and this development will not be a significant shift for them. However, small merchants may pass on at least part of the burden to customers, if not the full burden, according to Kumar Rajagopalan, executive director & CEO at Retailers Association of India (RAI).
According to a LocalCircles survey, only 17% of merchants and businesses are willing to bear a 0.4% merchant discount rate (MDR) on Unified Payments Interface (UPI) transactions above ₹2,000. The survey received over 32,000 responses from merchants and businesses across 242 districts, with 48% from Tier-I districts, 33% from Tier-II, and 19% from Tier-III and Tier-IV districts. When asked about maximum MDR willingness, 41% of respondents said they would not bear any MDR charge, while 9% indicated they do not accept UPI payments. The survey reveals a clear pattern of declining merchant acceptance as MDR rates increase, with 15% of respondents willing to bear a maximum MDR of 0.04%, while 5% each were willing to accept up to 0.1%, 0.2%, and 0.5%. 8% were willing to pay up to 0.25%, and 12% were willing to bear an MDR of up to 1%.
The government announced on Tuesday to introduce a 0.4% fee on UPI payments to merchants above ₹2,000, effective October 15. This policy comes after the government barred banks and payment system providers from charging fees on UPI payments of up to ₹2,000 on September 14. The same protection applies to RuPay debit card payments, with payments above ₹2,000 left outside the exemption, allowing for the possibility of MDR on higher-value transactions. According to Business Standard, the National Payments Corporation of India (NPCI) notified a 0.4% MDR on person-to-merchant (P2M) transactions above ₹2,000, with a cap of ₹300. Peer-to-peer transactions and transactions made to small vendors, known as the P2PM category, continue to remain free regardless of transaction size. The framework also provides for a flat MDR of ₹5 per transaction for certain categories including railways, telecom services, insurance and fuel, for transactions above ₹2,000.
The policy presents particular challenges for kirana stores, with close to 60% of payments made at kirana stores currently processed through UPI, according to Dhairyashil Patil, president of All India Consumer Products Distributors Federation (AICPDF). As per The Times of India, several kirana stores, particularly those operating out of metros and major cities, easily make more than ₹1 lakh per month through UPI payments, which puts them outside the zero-MDR threshold. For smaller merchants, the option could be to split payments of over ₹2,000 into a few separate transactions to avoid payment of MDR, pushing up overall UPI volumes, suggested Parijat Garg, independent fintech analyst. However, he noted that this could be challenging as the universe of merchants and retailers in UPI is much higher than in cards, making enforcement difficult. According to Business Standard, merchants are not allowed to pass the MDR on to customers, and the buyer continues to pay the listed price while the applicable MDR is borne by the merchant.
The All India Consumer Products Distributors Federation (AICPDF) has flagged significant concerns over the new UPI merchant charges, warning that the charges could hurt retail trade at a time when small traders, retailers and distributors are under severe margin pressure. The federation has urged the Centre and called for a zero-MDR mechanism to protect small retailers and micro, small and medium enterprises (MSMEs). As per The Times of India, Anjan Chatterjee, founder at Speciality Restaurants, which owns brands Oh! Calcutta and Mainland China, noted that any money pinches but for them, there won't be a major impact unless the volume of payments made through UPI goes up. He pointed out that currently, a major chunk of their customers are credit-card oriented and annual transactions made through UPI amounts to about ₹7-8 crore for them, which they won't pass on to consumers. UPI continues to handle substantial transaction volumes, processing 24.51 billion transactions worth ₹29.82 trillion in August 2026, with an earlier LocalCircles survey finding that 53% of UPI users would move away from the payment method for transactions above ₹3,000 if merchants passed on the MDR.
According to Business Standard, small merchants do not need to replace their existing UPI QR codes because of the new MDR framework. Existing QR codes and soundboxes will continue to work, and merchants do not need to re-register their QR codes or visit a bank branch. The ₹2,000 threshold does not mean that every individual UPI payment above this amount will automatically attract MDR. For a merchant classified as P2PM, receiving a single payment of ₹3,000 or ₹5,000 does not by itself make the transaction chargeable, as MDR applicability depends on the overall categorisation of the merchant account rather than simply the amount of one payment. Industry experts believe the impact on quick-commerce and e-commerce businesses will be limited as most transactions remain below the ₹2,000 threshold. Satish Meena from Datum Intelligence noted that the impact on q-com and e-com will not be as big because a dominant count of transactions, especially on q-com, are below ₹600.
