For millions of Indians, buying something, scanning QR code and the payment is done in seconds just on a click has become a routine. Whether it is paying for groceries, ordering food or splitting a restaurant bill, Unified Payments Interface (UPI) has made digital payments simple.
But after more than six years of largely free UPI transactions, the Indian government is changing the way some merchant payments are funded.
India is all set to introduce a Merchant Discount Rate (MDR) of 0.4 per cent on specified UPI Payments to merchants above Rs 2,000 ($21), starting from October 15, 2026.
The move marks a shift away from UPI’s long-standing zero-MDR model for such transactions.
The change, however, does not mean that consumers will suddenly have to pay a UPI fee every time they scan a QR code.
India’s Finance Ministry has clarified that person-to-person UPI transfers will remain completely free, regardless of the amount. Payments to merchants up to Rs 2,000 will also remain free, while transactions covered under the zero-MDR framework for small merchants will continue without the fee.
The government estimates that about 96% of person-to-merchant UPI transactions will remain unaffected.
So, What Is MDR and Who Will Pay The Price?
Merchant Discount Rate is essentially a fee within the payment ecosystem for processing a merchant transaction.
Only larger merchant transactions above Rs 2,000 attract a fee of 0.4 Percent, which will completely borne by merchants. Meanwhile, Railways, fuel, telecom, bill payments, insurance, etc have a flat fee of Rs 5 per transaction above Rs 2,000.
The government has stressed that MDR is not a tax and is not money collected by the government or the National Payments Corporation of India (NPCI), which operates UPI.
While rolling out the plan, the government also clarified that all the Banks have been instructed to ensure Merchants do not pass MDR costs to customers. It is also said there will be no hidden charges on UPI apps.
Why Is India Changing The UPI Model?
UPI has grown at a staggering pace.
According to the government official data, Alone in August, the system processed 24.5 billion transactions worth Rs 29.82 trillion. UPI now accounts for about 84 percent of India’s digital payments by volume and around 49 percent of global real-time payment volumes, according to the government.
That scale also comes with a cost. Banks, payment companies and technology providers have to maintain the infrastructure behind billions of transactions, while continuing to invest in cybersecurity and reliability.
The government says the new framework is aimed at creating a sustainable revenue model without putting charges on ordinary users or small merchants.
The change has also sparked political criticism in the country.
Opposition leader Rahul Gandhi accused the government of opening the door to fees on UPI merchant payments. He said that even if customers are not directly charged, merchants could eventually pass the additional cost on through higher prices.
“The government says no fees will be charged to customers. But where will the fees imposed on shopkeepers ultimately come from? Added to prices, straight out of the customer’s pocket,“said Gandhi in an X post.
Gandhi also alleged that American payment companies had opposed India’s zero-MDR policy and claimed the change was linked to US pressure.
In a video posted on X, Gandhi urged Prime Minister Modi to “stop lying down in front of the US, have a spine, stand up” and rollback the “UPI tax”.
The government rejected that claim.
The Finance Ministry said India’s UPI policy decisions were made independently and denied that the new framework was the result of foreign influence. It said the objective was to create a “self-sustaining, inclusive, and affordable” digital payments ecosystem.
Soon after the government announcement of MDR, BharatPe co-founder Ashneer Grover also questioned the need for it.
In a post on X, Grover compared the financial figures of India’s banks, the Reserve Bank of India and NPCI. He argued that UPI has helped India reduce its dependence on cash and questioned whether the digital payment network really needs a levy to remain sustainable.
“Any levy on UPI is nothing but tax collection in disguise. UPI is the one scientific achievement India can proudly claim as its own, and now it’s about to be sacrificed at the altar of tax.”
Ashish Misra, Deputy CEO of BLS E-Services, offered a more positive assessment of the change.
He said, “the 0.4% MDR on specified merchant payments above Rs 2,000 could help banks and payment companies recover some of the costs involved in running the digital payments infrastructure. In the long run, it will make the digital payments network stronger and more stable.“
Misra said the additional revenue could support investment in security, reliability and innovation. He also argued that the impact on merchants would be limited because the fee applies only to specified higher-value transactions.
What Does It Mean For Consumers?
If you are sending Rs 5,000 to a friend through UPI, nothing changes. Person-to-person payments remain free.
If you scan a QR code to pay a merchant Rs 1,500, there is no MDR.
If you make a specified merchant payment above Rs 2,000, the payment ecosystem may now attract MDR, although the customer cannot be directly charged the MDR under the new framework.
The change is less about making UPI itself a paid service and more about changing who funds the infrastructure behind India’s enormous digital payment network.
