UPI charges explained: Understand the 0.4% merchant MDR, who pays the fee, its impact on businesses and consumers, and India’s cashless economy
Kashish Singh, Lovely Wadhwani and Dr Shiba Shankar Pattayat
Paying through mobile taps in India had been magical for about six years before it suddenly lost its charm. It started with the introduction of the Unified Payments Interface (UPI) by the National Payments Corporation of India (NPCI) in April 2016. The idea behind UPI was to enable instant payments from one bank account to another using a mobile phone without having to enter account information. It was meant to be part of India’s attempt to move towards a cashless economy.
It happened to be at the right time, as demonetisation took place in November 2016. Following demonetisation, the government introduced schemes and incentives to promote digital payments by rewarding consumers and merchants for doing so. Programmes like the Lucky Grahak Yojana incentivised consumers, while the Digi-Dhan Vyapar Yojana rewarded merchants for digital transactions. The government made it very clear that the goal of these schemes was to help India move towards a cashless economy and mitigate black money and corruption.
By the end of August 2026, 24.51 billion transactions worth ₹29.82 lakh crore had been made using the UPI system, which is quite remarkable indeed. What matters most is the fact that an alternative payment method has now become a fundamental part of the economy itself.
Recently, the NPCI and the Ministry of Finance announced that, from October 15, 2026, a merchant discount rate (MDR) of 0.4% would be imposed on merchant UPI transactions exceeding ₹2,000, capped at ₹300 per transaction for transactions exceeding ₹75,000. However, there are no such charges for person-to-person (P2P) payments or P2M transactions below ₹2,000. And that brings us to the interesting part.
There is no point in consumers using a payment network unless merchants accept it, and vice versa. Making payments through a free platform minimised the cost of accessing the platform and allowed both sides to develop concurrently. Government incentives and MDR reimbursements contributed to encouraging merchants to accept the payment system. For instance, in 2017, the government authorised the reimbursement of MDR on qualifying transactions of up to ₹2,000 to encourage the adoption of digital payments and move towards a cashless economy.
Yet, there has always been a price behind the “free” service. Providing a payment network on such a scale requires expenditure on infrastructure and technology, including cybersecurity and resilience. The government has now clearly positioned the new MDR system as a means of ensuring the sustainability and resilience of the UPI system in India.
From a legal perspective, MDR applies to the merchant and not the consumer. The government has also stated that MDR is neither a tax nor a charge levied by the government but is instead shared among all the participants in the payment system, including banks and payment service providers.
This is where the subject becomes interesting from an economic perspective rather than merely a technical one. Legal incidence may not always be equal to economic incidence. If a merchant pays the MDR, the merchant cannot charge it separately to the customer as a “UPI fee”. The merchant, however, could adjust discounts, increase prices, bear the expense through reduced margins or shift the mode of payment. How much of the cost gets transferred depends on factors such as competition and the price elasticity of demand.
Merchant’s Perspective: If the merchant officially pays, does the merchant actually bear the entire economic burden?
It will vary from market to market. A large retailer with substantial margins will be able to absorb the cost. A highly competitive firm will not be able to raise its prices. A marginally profitable merchant will react in a completely different way: refusing to accept UPI payments for specific transactions and asking consumers to pay in cash.
And this generates the second policy issue, which is possibly even more serious than the first one. One of the general goals of the drive towards digital payments in India was to wean the economy off cash and make it operate within a more transparent and trackable formal framework.
However, if MDR discourages some merchants from accepting digital payments, cash would become relatively more attractive again, which would run counter to the objective of reducing black money through a cashless system.
From an economic perspective, the structure that has emerged has some similarities with Ramsey pricing theory (1927), which seeks to recover more of the costs from transactions where digital payments may be somewhat less price-sensitive while protecting everyday low-value transactions, as any additional cost could prompt consumers to return to cash payments. This is an economic interpretation rather than the government’s stated description of the policy.
The real test, therefore, is not simply whether merchants legally pay 0.4%. It is what they do in response. The economic responsibility, however, need not remain where the legal one does. Merchants can cover their own costs, raise prices, reduce discounts or even encourage cash payments. Should digital payments become less appealing to merchants, the consequences could be far-reaching, extending beyond the cost of payments to issues of formalisation, transparency and even the digital economy.
This means that UPI itself is now standing at a crucial turning point: moving from developing the adoption of “free” payments to sustaining the underlying infrastructure. The key question, then, is not only who will bear the MDR but also who will bear its economic cost?
| Transaction Category / Instrument | Transaction Value Threshold | Merchant MDR / Fee |
| PersontoPerson (P2P Transfer) | Any Amount | N/A (Exempt) |
| Micro-Merchants (P2PM Framework) | Monthly Receipts ≤ ₹1 Lakh | 0.00% (Exempt) |
| Routine Retail Purchases (P2M) | Ticket Size ≤ ₹2,000 | 0.00% (Exempt) |
| Standard Commercial Enterprise | Ticket Size > ₹2,000 | 0.40% of transaction value |
| High-Value Commercial Purchases | Ticket Size ≥ ₹75,000 | Capped at ₹300.00 maximum |
| Essential Utilities, Fuel & Telecom | Ticket Size > ₹2,000 | Flat ₹5.00 per transaction |
| Capital Market Transactions | Ticket Size > ₹2,000 | 0.02% (Capped at ₹300.00) |
Source: Ministry of Finance/PIB Delhi, “UPI Continues to Remain Free for Peer-to-Peer Transactions and 96% of Merchant Transactions,” September 15, 2026.
(Dr Shiba Shankar Pattayat is an Assistant Professor, while Kashish Singh and Lovely Wadhwani are students in the Department of Economics, Christ University, Bangalore. Views expressed are personal.)