The Reserve Bank of India (RBI) has endorsed the introduction of merchant discount rate (MDR) charges of 0.4% on person-to-merchant (P2M) transactions on the unified payments interface (UPI) for transactions exceeding ₹2,000, with an overall cap of ₹300. According to the RBI's statement on X, the central bank views this as an important step towards strengthening the long-term sustainability of India's digital payments ecosystem. The RBI emphasized that "a fair and appropriate distribution of MDR across ecosystem participants will support continued investment in technology, infrastructure and acceptance networks" to enable wider UPI acceptance and sustained growth in transaction volumes. Importantly, all UPI transactions - P2P and P2M - will remain free for users, with P2M transactions below ₹2,000 continuing to be free for merchants, while MDR may be levied on merchants for P2M transactions above this threshold. The framework layers different rates across categories of transactions rather than applying a blanket charge, with on a ₹3,000 purchase, the 0.4% rate works out to a ₹12 fee paid by the merchant to its acquiring bank, while on a ₹50,000 purchase, it comes to ₹200, and on a ₹1,00,000 purchase, the percentage calculation would otherwise total ₹400, but the fixed ₹300 ceiling applies instead. Sources indicate that about 96% of transactions will remain outside the purview of MDR and only 4-5% of the large merchants will be impacted, ensuring minimal effect on day-to-day small-ticket payments for items like groceries, transport, and similar purchases.
The new framework provides comprehensive protection for small merchants, with street vendors and neighbourhood shops receiving up to ₹1 lakh per month through UPI QR codes under the Person-to-Person-Merchant (P2PM) category continuing to enjoy zero MDR on all transactions. As per the latest reports, this provision will protect street vendors, neighbourhood shops and other small businesses from additional payment costs. For transactions of ₹75,000 and above, the MDR will be capped at ₹300 per transaction, while transactions above ₹2,000 in essential and thin-margin sectors including railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat MDR of ₹5 per transaction. A dedicated fund will be established to promote UPI adoption among small merchants, with 5% of total MDR collections to be contributed to this fund. Vendors receiving up to ₹1 lakh a month via UPI QR codes - classified under a Person-to-Person-Merchant (P2PM) framework - will continue to pay zero MDR on all transactions, with no requirement to register for GST or upgrade existing QR infrastructure. Acquiring banks will track inward payments via a velocity check, and merchants exceeding ₹1 lakh a month for three consecutive months move into the standard P2M category.
The introduction of MDR charges on UPI transactions could provide a significant boost to retail CBDC adoption, as some users and merchants may move towards the digital rupee to avoid such charges. As reported by Mint, former RBI deputy governor R. Gandhi noted that if merchants want to avoid transaction costs or MDR on larger-value transactions, they will have the option of accepting payments through CBDC, where there may not be any charge. CBDC transactions do not involve MDR because they do not require the interbank settlement chain involved in usual account-to-account payment transactions, as CBDC operates as a sovereign form of digital money without the trappings of MDR. However, CBDC adoption remains in the pilot stage and requires considerable customer engagement and awareness, as most Indians still don't understand what it means or how it works. A recent report by CareEdge Ratings noted that person-to-merchant (P2M) transactions constitute 29% of total UPI transaction value, with 67.2% of P2M transaction value exceeding ₹2,000. "This implies that only about 19.5% of the value of overall UPI transactions potentially falls within the potential MDR threshold as of FY26, suggesting that the framework is targeted towards a relatively narrow segment of the ecosystem," it said. Based on a potential MDR-addressable pool of ₹61.13 lakh crore in FY26, a nominal MDR of 0.25% to 0.50% on select higher-value merchant transactions could generate a gross revenue opportunity of ₹15,000 crore to ₹30,000 crore, while keeping consumers and P2P payments free.
The government is in an advanced stage of finalizing specific use cases to enable retail CBDC adoption, starting with government subsidies under agriculture. According to Mint reports, with programmable CBDC, payouts under direct benefit transfer can be transferred to farmers for agriculture-related purposes such as buying fertilizer or seeds. The central bank is currently running state-level pilots for direct benefit transfer of subsidies, with the pilot for the first such use case expected to be rolled out in the next six to seven months. Other use cases being considered include payouts under the Ayushman Bharat Scheme for healthcare, educational fees and payments, and rural and semi-urban use cases through offline CBDC wallets. Zero MDR under this framework also extends to rural and semi-urban QR payments, an area the government has flagged as a core policy priority.
The government views shifting some low-value transactions to CBDC as essential for easing the burden on UPI infrastructure, which experienced at least two major outages in 2025. As reported by Mint, the idea is to distribute load across different channels and reduce the burden on UPI, as the platform processed 241.6 billion transactions worth ₹314.2 trillion in FY26, representing a 30% increase in volume and 21% increase in value compared to the previous year. UPI had over 550 million users as of August 2026, according to NPCI data, making infrastructure reliability crucial for maintaining credibility. Government data analysis suggests only about 4% of merchant transactions will actually be touched by the new MDR, since most fall below the ₹2,000 threshold or qualify for the zero-MDR framework for small merchants. Officials argue merchants typically absorb such processing costs as a standard operational overhead, offset by higher transaction volumes. The new framework indicates that MDR will apply to only about 4% of merchant transactions, meaning approximately 96% of merchant transactions will remain unaffected, as they are either below the ₹2,000 threshold or covered by the zero-MDR framework for small merchants.
India's CBDC, known as the 'digital rupee' or 'e-rupee', has reached 12 million users with more than 175 million transactions processed worth nearly ₹400 billion since launch. According to Mint reports, the value of bank notes in circulation under CBDC-R was ₹771.66 crore as on 31 March 2026, lower than ₹1,016.46 crore as on 31 March 2025. The central bank introduced CBDC in two formats: the pilot for wholesale e-rupee (CBDC-W) was launched on 1 November 2022, and for retail e-rupee (CBDC-R) exactly a month later. CBDC is interoperable with UPI, allowing payments through UPI infrastructure and QR codes, though backend processing by banks and the RBI still requires development before full-scale rollout.
