New UPI framework begins; customers not to be charged MDR

The new UPI framework has taken effect, introducing a 0.4% merchant discount rate on specified merchant transactions above ₹2,000, though the government says customers will not be charged MDR. Fuel, railway ticket, insurance premium and electricity or water bill payments above ₹2,000 attract a flat ₹5 MDR instead. Person-to-person transfers remain free regardless of amount, and merchant payments up to ₹2,000 stay free. The government said only about 4% of merchant transactions will be affected.

Written by AI from Hindustan Times — India · not yet reviewed by an editor · Published 16 Sept 2026, 11:56 am IST

Source

Hindustan Times — India · read the original report ↗

#upi#mdr#digital payments#npci#banking

Desk check · compared with the source

What the desk checked (5)

A 0.4% MDR applies on specified merchant UPI transactions above ₹2,000, but customers will not be charged. — Attributed to the government in the source; figure appears in source text.
Fuel, railway ticket, insurance premium and utility payments above ₹2,000 attract a flat ₹5 MDR instead of 0.4%. — Stated in the source's government-sourced FAQ section; consistent across the article.
Person-to-person UPI transfers remain free irrespective of amount, and merchant payments up to ₹2,000 remain free. — Attributed to the government; internally consistent.
MDR will apply to only about 4% of merchant transactions, with about 96% unaffected. — Attributed to the government; the two figures are mutually consistent.
The framework was introduced under the Payment and Settlement Systems Act, 2007 after deliberations by the UPI Steering Committee. — Attributed to the central government; no independent documentation cited in source.

Written by AI from Hindustan Times — India · not yet reviewed by an editor · How we use AI · Report an error

Analysts’ view opinion

AI Economic Analyst

This is a structural shift in UPI's economics — a system built on zero fees now gets a revenue line. Because the government says MDR touches only about 4 per cent of merchant transactions, the cost lands narrowly on businesses that accept high-value payments, while person-to-person transfers and small merchants stay outside it. The clear gainers are banks, payment service providers and UPI apps, which get an income stream they did not have before.

The design intent is to keep the consumer-facing price effect minimal: merchants are not to pass MDR on to customers, and apps are barred from platform fees or hidden charges.
Using a flat ₹5 instead of a percentage for fuel, railway tickets, insurance premiums, utility bills and education fees is economically sensible, since these are high-ticket, thin-margin categories where a percentage charge would scale painfully.
Continued zero MDR for small merchants receiving up to ₹1 lakh a month via QR protects the segment most sensitive to any friction in digital acceptance.
The stated purpose of the revenue — expanding payment infrastructure, including in rural and semi-urban areas — frames this as a short-term cost for long-term system sustainability.
The counter-argument deserves airing: business costs tend to find their way into prices somehow, so how firmly the no-pass-on instruction is enforced will decide whether households feel anything at all.

What to watch — Watch whether high-value merchants quietly recover the MDR through pricing or steer customers to cards and cash, and whether payments start getting split to stay under the ₹2,000 threshold.

The story does not establish how much revenue the MDR will raise, how it will be shared between banks, PSPs and apps, or how the ban on passing charges to customers will be monitored and enforced.

Deep dive

Research brief · 8 facts · 3 dates · exam-ready

The brief

Context

The Unified Payments Interface (UPI), India's real-time retail payments system, has operated on a zero merchant discount rate (MDR) basis for years, meaning neither customers nor merchants paid a transaction fee. A new framework has now taken effect that introduces MDR on larger merchant transactions — a 0.4% rate on specified merchant payments above ₹2,000, and a flat ₹5 charge for designated categories such as fuel, railway tickets, insurance premiums and utility bills. The government says the change is aimed at the long-term financial sustainability of UPI, and that customers will not be charged MDR, with banks advised to prevent merchants from passing it on. The framework was notified under the Payment and Settlement Systems Act, 2007 after deliberations by the UPI Steering Committee.

Key facts

The new UPI framework introduces a 0.4% merchant discount rate (MDR) on specified merchant transactions above ₹2,000.
Person-to-person UPI transfers remain completely free irrespective of amount; person-to-merchant payments up to ₹2,000 also remain free.
Fuel, railway ticket, insurance premium and electricity or water bill payments above ₹2,000 attract a flat ₹5 MDR instead of 0.4%.
Educational fee collections above ₹2,000 fall under a designated Industry programme category with flat-fee structures or capped processing rates; up to ₹2,000 they are MDR-free.
Small merchants receiving up to ₹1 lakh per month through UPI QR codes under the P2PM category continue to enjoy zero MDR.
Government says MDR will apply to only about 4% of merchant transactions, with roughly 96% unaffected.
Banks have been advised to ensure merchants do not pass MDR on to customers; UPI app providers are expressly prohibited from imposing platform fees or hidden charges.
The framework was introduced under the Payment and Settlement Systems Act, 2007, following deliberations by the UPI Steering Committee on rates, operational arrangements and consumer safeguards.

Timeline

Before the new frameworkUPI operated in a zero-fee era; NPCI has said this era had to end.
October 15 (as referenced in the story)UPI merchant charges begin under the new framework.
Now (framework in effect)0.4% MDR applies on specified merchant transactions above ₹2,000; flat ₹5 MDR on designated categories such as fuel, rail, insurance and utilities.

Who has a stake

UPI customers / individuals — P2P transfers stay free at any amount; merchant payments up to ₹2,000 free; government says MDR is not a customer-facing charge.
Merchants (large) — Bear 0.4% MDR on specified transactions above ₹2,000 and are barred from passing it to customers.
Small merchants under P2PM — Continue at zero MDR for QR collections up to ₹1 lakh per month.
Banks and payment service providers — Gain revenue from larger merchant transactions to fund payment infrastructure; advised to police pass-through of MDR.
UPI application providers (e.g., PhonePe, Paytm) — Share in new revenue but are expressly prohibited from levying platform fees or hidden charges.
NPCI and the UPI Steering Committee — Responsible for the framework's rates, operational arrangements and consumer safeguards; NPCI says the zero-fee era had to end.
Government of India — Balancing UPI's long-term sustainability against keeping digital payments free for individuals and small merchants.
Schools, colleges and students — Fee collections above ₹2,000 get flat or capped rates to avoid heavy percentage-based charges; below ₹2,000 stays free.

Why it matters

UPI is the backbone of everyday retail payments in India, and its zero-fee model, while driving mass adoption, left banks and payment firms without direct revenue to sustain and expand the network. The new framework attempts a middle path — monetising only high-value merchant transactions while keeping individuals, small merchants and small-ticket payments free. How strictly the ban on passing MDR to customers and on platform fees is enforced will decide whether users actually feel the change.

UPSC angle

Prelims pointers

MDR = Merchant Discount Rate, a charge within the merchant payment ecosystem, not a customer fee.
New UPI framework: 0.4% MDR on specified merchant transactions above ₹2,000; flat ₹5 for fuel, railway tickets, insurance premiums, electricity/water bills above ₹2,000.
All person-to-person UPI transactions remain free irrespective of amount; person-to-merchant payments up to ₹2,000 remain free.
P2PM category: small merchants receiving up to ₹1 lakh per month via UPI QR codes continue at zero MDR.
Framework notified under the Payment and Settlement Systems Act, 2007, after deliberations by the UPI Steering Committee.
Government estimate: MDR applies to about 4% of merchant transactions; about 96% unaffected.

Mains framing

India's UPI scaled rapidly on a zero-MDR model, but that model gave banks, payment service providers and app providers no direct transaction revenue to maintain and expand infrastructure — the reason NPCI has argued the zero-fee era had to end. The new framework, notified under the Payment and Settlement Systems Act, 2007 after UPI Steering Committee deliberations, seeks a calibrated monetisation: a 0.4% MDR only on specified merchant transactions above ₹2,000, a flat ₹5 charge in designated categories such as fuel, railway tickets, insurance premiums and utility bills, and flat or capped rates for educational fees, while person-to-person transfers, sub-₹2,000 merchant payments and small merchants under the P2PM ceiling of ₹1 lakh a month stay free. The government estimates only about 4% of merchant transactions are affected. The equity question turns on incidence: MDR is a cost inside the merchant ecosystem, and banks have been advised to prevent merchants from passing it on while UPI apps are barred from platform or hidden fees. The way forward lies in transparent disclosure, active supervision against surcharging and disguised fees, monitoring whether large merchants absorb costs or reprice goods, and ensuring the resulting revenue is genuinely channelled into payment infrastructure in rural and semi-urban areas as intended.

Key terms

UPI (Unified Payments Interface): India's real-time payments system used for person-to-person and person-to-merchant transfers via apps and QR codes.
MDR (Merchant Discount Rate): A fee levied within the merchant payment ecosystem on a transaction; under this framework it is not to be charged to customers.
P2PM: Person-to-merchant small-merchant category; merchants receiving up to ₹1 lakh a month via UPI QR codes stay at zero MDR.
NPCI: The body behind UPI, which has said the zero-fee era had to end for sustainability.
UPI Steering Committee: Body whose detailed deliberations decided the applicable rates, operational arrangements and consumer safeguards in the new framework.
Payment and Settlement Systems Act, 2007: The statute under which the central government said the new UPI charging framework has been introduced.

Practice questions

Examine the rationale for ending UPI's zero-MDR regime for large merchant transactions. How does the new framework attempt to balance financial sustainability with universal access to digital payments?
"MDR is a cost within the merchant ecosystem, not a customer charge." Critically assess the regulatory safeguards needed to ensure this distinction holds in practice.
Discuss how differentiated pricing — 0.4% for specified merchants, flat ₹5 for fuel, rail, insurance and utilities, and capped rates for education — reflects sectoral considerations in payments policy.

Grounded only in the source report — figures and dates are the source's, not inferred.

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