By ipomarket.in Editorial Team · Last reviewed: 2026-09-15
Disclaimer: This article is for informational purposes only and does not constitute investment advice. IPO investments are subject to market risks. Please read the offer document carefully and consult a SEBI-registered investment advisor before investing.
After nearly six years of fully free UPI payments, India is introducing selective charges on high-value merchant transactions. The revised Merchant Discount Rate (MDR) framework is set to take effect from 15 October 2026. Before you worry about your daily payments, here is the important part first: if you send money to friends and family, or pay a shopkeeper up to Rs 2,000, nothing changes for you.
MDR is a fee charged within the merchant payment ecosystem, not a charge on the customer making the payment. This article breaks down what stays free, what now attracts a fee, who bears the cost, and why the government is bringing MDR back.
What is MDR?
Merchant Discount Rate (MDR) is the fee a merchant pays to the payment industry — banks, NPCI (National Payments Corporation of India), and payment service providers — for processing a digital transaction. It is how the ecosystem recovers the cost of running the payment rails.
UPI was not always free. Before 2020, an MDR of up to 0.30% (capped at Rs 100 per transaction) applied to UPI person-to-merchant payments. The government scrapped MDR on UPI and RuPay debit cards in 2020 to accelerate adoption of digital payments. That zero-MDR era is now being partly rolled back for high-value merchant transactions.
What stays completely free
Person-to-person (P2P) transfers
All P2P transfers remain at zero fees, regardless of the amount. According to the framework, individuals continue to have unlimited free usage with no monthly quotas, volume restrictions, or tiered caps. There are no transaction, platform, or hidden charges from UPI apps or banks on money you send to another individual.
Merchant payments up to Rs 2,000
All person-to-merchant (P2M) payments up to Rs 2,000 stay outside the scope of MDR. Since the vast majority of everyday UPI payments — your chai, groceries, auto fare — fall below this threshold, most transactions are untouched. The government has stated that more than 95% of all UPI P2M transactions will not be affected.
Small merchants under the P2PM framework
Small merchants receiving up to Rs 1 lakh per month through UPI QR codes, classified under the P2PM (person-to-person merchant) framework, remain exempt from MDR on all their transactions. This is designed to protect street vendors and small shopkeepers.
Taken together, the government estimates only about 4% of merchant transactions will be affected by the new charges.
What now attracts a charge
Here is where the fees kick in — and remember, these are borne by the merchant, not you as a customer.
Regular merchant transactions above Rs 2,000
A 0.4% MDR applies to P2M UPI transactions above Rs 2,000. The charge is capped at Rs 300 per transaction, which is reached at a payment value of Rs 75,000 and above.
Essential sectors — a flat Rs 5
Certain essential sectors — railways, telecom, insurance, fuel, and agriculture inputs — will instead attract a flat MDR of Rs 5 per transaction for payments above Rs 2,000, rather than the percentage-based rate.
Capital markets and financial instruments
Here is the part relevant to investors. Payments for mutual funds, securities, and to stock brokers and dealers attract a lower MDR of 0.02%, capped at Rs 300 per transaction. This is a notably lighter rate than the general 0.4%.
If you fund a mutual fund SIP or transfer money to your broker via UPI, this MDR sits with the merchant (the broker or fund house), not with you. The government has been explicit that customers will not be required to pay any charge when making these payments through UPI.
At-a-glance summary
| Transaction type | MDR |
|---|---|
| P2P transfers (any amount) | Free |
| P2M up to Rs 2,000 | Free |
| Small merchants (up to Rs 1 lakh/month) | Free |
| P2M above Rs 2,000 (general) | 0.4%, capped at Rs 300 |
| Essential sectors above Rs 2,000 | Rs 5 flat |
| Mutual funds, securities, brokers | 0.02%, capped at Rs 300 |
Who actually pays?
The finance ministry has been clear: "Customers will not be required to pay any charge when making such payments through UPI. MDR is a charge within the merchant payment ecosystem. It is not a charge on customers making UPI payments."
To protect users, UPI app providers will not be permitted to levy platform fees or hidden charges. Banks have been advised to ensure merchants do not pass MDR costs on to customers. That said, the enforcement mechanisms for preventing pass-through are still being developed, so how firmly this holds in practice is worth watching after 15 October.
Why bring MDR back?
The short answer is sustainability. Running UPI at massive scale is expensive, and someone has to fund it.
When a customer pays a merchant over UPI, the stakeholders bear a cost of roughly 0.25% of the transaction value. On a Rs 1,000 payment, that is about Rs 2.50. Industry estimates put the real subsidy needed to cover P2M transaction costs at Rs 4,000–5,000 crore a year — though this figure is an industry estimate, not an official government number.
The scale is enormous. UPI volumes rose from 172.2 billion transactions in 2024 to 228.3 billion in 2025, with more than 55 crore users reported as of August 2026. Zero MDR was affordable as a nation-building subsidy; at this volume, the framework is being adjusted to keep the system funded without burdening ordinary users or small merchants.
The change operates under the Payment and Settlement Systems Act, 2007, as amended. Importantly, the enabling legislation itself does not fix a fee — it gives the government the legal authority to decide which payment modes or transactions remain free. The exact rates and merchant categories may still be refined by the UPI and Services Steering Committee, headed by NPCI.
What this means for investors
For retail investors funding SIPs, buying stocks, or transferring money to a broker, the practical impact is minimal. The 0.02% MDR on capital-market payments is levied on the merchant side, and you should not see a charge on your end when you pay via UPI. If you use UPI to fund an IPO application through your broker or an ASBA-linked UPI mandate, the customer-side experience is unchanged for now.
Worth noting: a portion equivalent to 5% of total MDR collections is reported to be earmarked for a dedicated fund supporting UPI adoption among small merchants. This detail appeared in the government brief but awaits independent operational confirmation from NPCI.
If you are comparing how you fund IPOs and investments, our guide on applying for an IPO online in 2026 walks through the UPI and ASBA routes in detail.
What remains unclear
Several operational details are still pending:
- Final rates and categories may be refined by the NPCI-led steering committee before or after rollout.
- The small merchant fund (reportedly 5% of MDR collections) lacks a confirmed size and timeline.
- Pass-through enforcement — the assurance that merchants will not shift MDR to customers — depends on enforcement mechanisms still being built.
- Official revenue projections have not been disclosed.
FAQ
Will my UPI payments to friends and family become charged?
No. All person-to-person (P2P) transfers continue to have zero fees, regardless of the amount, with no transaction, platform, or hidden charges from UPI apps or banks.
Are payments up to Rs 2,000 free?
Yes. All person-to-merchant (P2M) transactions up to Rs 2,000 remain outside the scope of MDR and stay free.
Who pays the MDR — the customer or the merchant?
The merchant. The government has stated that customers will not be required to pay any charge when making UPI payments. MDR is a fee within the merchant payment ecosystem.
What happens to mutual fund and stock brokerage payments?
Payments for mutual funds, securities, and to stock brokers and dealers attract a lower MDR of 0.02%, capped at Rs 300 per transaction. This is charged on the merchant side, not to you as the customer.
When does the new framework take effect?
The revised UPI MDR framework is set to come into effect from 15 October 2026, according to multiple credible reports, though final rates may still be refined by the NPCI-led steering committee.
Last reviewed: 2026-09-15. Figures and dates are based on government announcements and news reports available at the time of writing; readers should verify against official NPCI and Ministry of Finance releases before acting.