MDR on UPI from October 15, 2026; 97.5% of transactions exempt

NPCI has allowed MDR on certain UPI payments from October 15, 2026. Mid- to large merchants receiving over ₹2,000 per transaction will pay 0.4%, capped at ₹300 for transactions of ₹75,000 and above. Essential sectors such as railways, telecom, insurance, fuel and agricultural inputs attract a flat ₹5, and capital market payments 0.02%. Person-to-person transfers and merchant payments up to ₹2,000 stay free. The Hindu's analysis found 97.5% of transactions remain exempt.

Written by AI from The Hindu — Business · not yet reviewed by an editor · Published 16 Sept 2026, 1:36 pm IST

Source

The Hindu — Business · read the original report ↗

#upi#mdr#npci#digital payments#banks

Desk check · compared with the source

What the desk checked (5)

MDR on certain UPI payments will apply from October 15, 2026 under an NPCI circular. — Attributed to the NPCI circular as cited in the source.
Mid- to large merchants pay 0.4% MDR on UPI transactions above ₹2,000, capped at ₹300 for transactions of ₹75,000 and above. — Figures appear directly in the source text.
97.5% of all UPI transactions will remain free of MDR, including all P2P transfers. — Based on The Hindu's analysis of NPCI volume data, as stated in the source.
Yes Bank is the payer bank in over 50% and payee bank in about 55% of UPI transactions, making it the biggest gainer. — Attributed to the source's analysis of NPCI data; no independent verification possible.
Maximum possible MDR earnings are about ₹2,400 crore a month or ₹28,000 crore a year. — Source presents this as its own calculation and notes actual collections will be lower.

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Analysts’ view opinion

AI Economic Analyst

This is the first real step from UPI as free public infrastructure towards infrastructure that recovers its costs — but it is a deliberately narrow step. While 97.5% of transactions by volume stay exempt, the slice that does attract MDR accounts for 20% of value, meaning the cost lands on large merchants' cash flows rather than on small shops. For banks and payment apps it opens a revenue line that did not exist before: the arithmetic points to a ceiling of roughly ₹2,400 crore a month, or about ₹28,000 crore a year, though exemptions, caps and flat rates will pull actual collections well below that.

The volume-versus-value gap is the key number: only 2.5% of transactions are chargeable, but they represent 20% of value — ₹5.99 lakh crore of the ₹29.8 lakh crore transacted in August 2026.
The gains are concentrated by design: 40% of collections goes to the payer's bank, 30% to the merchant's bank, 20% to the UPI app and 10% to the payment service provider, which places Yes Bank, ICICI, Axis, PhonePe and Google Pay in the strongest positions given their shares.
The price question is indirect rather than direct: consumers do not pay MDR, but whether merchants absorb or price in a 0.4% cost is precisely the Opposition's objection, against which the government says banks have been advised that the charge must not be passed on and that apps cannot levy platform or hidden fees.
The flat ₹5 for railways, telecom, insurance, fuel and agricultural inputs is a cost-certainty design for thin-margin, essential sectors, while the 0.02% rate on capital market payments is aimed at not discouraging retail participation in formal markets.
Exempting small merchants and street vendors receiving up to ₹1 lakh a month via QR codes limits the risk of slowing digital adoption at the bottom, and the government says 5% of MDR collections will fund small-merchant adoption.

What to watch — After October 15, 2026, watch whether merchants steer above-₹2,000 payments towards cards or cash, or split bills to stay under the threshold, and how the instruction not to pass the cost to customers is enforced in practice.

The story does not establish how much MDR will actually be collected, what each bank or app will earn, or whether the cost reaches consumer prices; the ₹28,000 crore annual figure is an absolute ceiling before exemptions and caps, and it is not specified whose share funds the 5% small-merchant pool.

Deep dive

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

The brief

Context

UPI, India's dominant retail payments rail, has so far been free of Merchant Discount Rate (MDR) charges. MDR is a fee paid by merchants to payment processors and banks for accepting a digital payment; consumers do not pay it directly. The National Payments Corporation of India (NPCI) has now issued a circular permitting MDR on certain UPI payments from October 15, 2026, sparking a political debate over whether merchants will pass the cost on to consumers. The Hindu's analysis of NPCI data finds 97.5% of UPI transactions by volume stay exempt.

Key facts

NPCI will allow MDR on certain UPI payments from October 15, 2026.
Mid- to large merchants receiving UPI payments above ₹2,000 per transaction pay MDR of 0.4%, capped at ₹300 for transactions of ₹75,000 and above.
Essential and thin-margin sectors — railways, telecom, insurance, fuel, agricultural inputs — attract a flat ₹5 MDR on transactions of ₹2,000 or more.
Capital market payments (mutual funds, stockbrokers, dealers, equities) attract 0.02% MDR, capped at ₹300 per transaction.
P2P transactions (about 37% of UPI volume) remain free; merchant payments up to ₹2,000 (60.5% of volume) are also free — 97.5% exempt in total.
P2M transactions above ₹2,000 are 2.5% of UPI volume but 20% of value: ₹5.99 lakh crore of the ₹29.8 lakh crore transacted over UPI in August 2026.
Maximum possible MDR earnings are about ₹2,400 crore a month or ₹28,000 crore a year, though exemptions and caps will lower this.
MDR split: payer's bank 40%, merchant's/payee bank 30%, UPI app (TPAP) 20%, Payment Service Provider 10%; 5% of total MDR collections goes to a fund to promote UPI adoption among small merchants.

Timeline

August 2026₹29.8 lakh crore transacted over UPI; P2M transactions above ₹2,000 accounted for ₹5.99 lakh crore.
September 15, 2026 (Tuesday)Ministry of Finance press release on the NPCI announcement says banks have been advised that merchants must not pass MDR to customers, and UPI apps are barred from platform or hidden fees.
October 15, 2026MDR on specified UPI payments takes effect.

Who has a stake

NPCI — Issued the circular setting MDR rates, slabs, caps and exemptions, and mandated the P2PM exemption for small merchants.
Ministry of Finance / Government — Argues consumer prices will not rise and merchant impact is minimal; advised banks to prevent pass-through of MDR.
Mid- to large merchants — Pay 0.4% MDR on UPI receipts above ₹2,000 per transaction, capped at ₹300 for ₹75,000 and above.
Small merchants and street vendors — Exempt from MDR if receiving up to ₹1 lakh a month via UPI QR codes under the P2PM category; a fund equal to 5% of MDR collections will promote their UPI adoption.
Yes Bank — Biggest gainer — payer bank in over 50% and payee bank in about 55% of all UPI transactions.
ICICI Bank and Axis Bank — ICICI is payer bank in 18.3% of transactions; Axis is payee bank in about 19%.
PhonePe and Google Pay (TPAPs) — Share the 20% TPAP portion of MDR; PhonePe has about 46% and Google Pay about 32% of UPI volume.
Consumers — Not charged directly; Opposition fears merchants will raise prices, government says platform or hidden fees are prohibited.

Why it matters

UPI's zero-cost model made it India's default payment rail, but it left banks and apps bearing the cost of running it; MDR creates a revenue stream of up to about ₹28,000 crore a year while leaving 97.5% of transactions untouched. The design deliberately protects small merchants, essential services and person-to-person transfers, so the political question is whether large merchants absorb the 0.4% or quietly pass it on. It also concentrates gains among a few players, notably Yes Bank, PhonePe and Google Pay.

UPSC angle

Prelims pointers

MDR (Merchant Discount Rate) on UPI effective October 15, 2026, per NPCI circular; 0.4% on P2M above ₹2,000, capped at ₹300 for ₹75,000+.
Flat ₹5 MDR for essential/thin-margin sectors: railways, telecom, insurance, fuel, agricultural inputs; 0.02% for capital market payments.
All P2P transfers remain free (about 37% of UPI volume); merchant payments up to ₹2,000 free (60.5%); total exempt 97.5%.
P2PM category: small merchants and street vendors receiving up to ₹1 lakh per month via UPI QR codes are exempt.
MDR revenue split — payer bank 40%, payee bank 30%, TPAP 20%, PSP 10%; 5% of collections to a small-merchant UPI adoption fund.
August 2026 UPI value: ₹29.8 lakh crore total; P2M above ₹2,000 was ₹5.99 lakh crore (20% of value, 2.5% of volume).

Mains framing

The reintroduction of MDR on UPI marks a shift from a fully subsidised, zero-cost payments rail to a partially monetised one, driven by the need to fund the authorisation, security, settlement and QR-deployment costs borne by banks, payment service providers and third-party apps. NPCI's design is calibrated rather than blanket: 0.4% applies only to person-to-merchant transactions above ₹2,000 from mid- to large merchants, with a ₹300 cap, a flat ₹5 for essential and thin-margin sectors such as railways, telecom, insurance, fuel and agricultural inputs, 0.02% for capital market payments to protect retail investor participation, and full exemption for all P2P transfers, sub-₹2,000 merchant payments and P2PM small merchants receiving up to ₹1 lakh a month. The result is that 97.5% of transactions by volume are untouched, while 20% of value — ₹5.99 lakh crore of August 2026's ₹29.8 lakh crore — becomes chargeable, yielding at most about ₹28,000 crore a year. Two concerns follow. First, incidence: the Opposition argues merchants will raise prices, and the government's response is advisory — banks have been asked to ensure no pass-through and apps are barred from platform or hidden fees — so enforcement and monitoring will decide credibility. Second, concentration: with Yes Bank as payer bank in over 50% and payee bank in about 55% of transactions, and PhonePe and Google Pay at 46% and 32% of volume, gains accrue narrowly. The 5% MDR-funded corpus for small-merchant UPI adoption is a mitigant, but the source does not specify who contributes it — a gap worth closing.

Key terms

MDR (Merchant Discount Rate): A fee paid by merchants to payment processors and banks for accepting a digital payment; not charged directly to consumers.
NPCI: National Payments Corporation of India, the body that operates UPI and issued the circular allowing MDR from October 15, 2026.
P2M / P2P: Person-to-merchant and person-to-person UPI transactions; all P2P transfers remain free of any charge regardless of amount.
P2PM: Person-to-Person-Merchant category for small merchants and street vendors receiving up to ₹1 lakh a month via UPI QR codes; exempt from MDR.
TPAP (Third-Party Application Provider): UPI apps such as PhonePe and Google Pay that receive 20% of the MDR collected.
Payment Service Provider (PSP): Entity connecting the technology partner bank and the UPI app to the central network switches; gets 10% of MDR.

Practice questions

Examine the rationale behind NPCI's tiered MDR structure on UPI and assess whether its exemptions adequately protect small merchants and consumers.
"Monetising a public digital infrastructure risks diluting its universality." Critically discuss with reference to the introduction of MDR on UPI from October 15, 2026.
The gains from UPI's MDR are concentrated among a few banks and apps. Discuss the competition and financial-stability implications of such concentration in India's retail payments ecosystem.

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

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