UPI has been free for merchants since it launched. That changes, partially, from October 15, 2026 and the confusion we're already fielding from clients is less about whether MDR applies to them and more about how much it actually costs on a real transaction. Here's the mechanics, with numbers.
What's changing NPCI has introduced a Merchant Discount Rate (MDR) of 0.4% on Person-to-Merchant (P2M) UPI transactions above ₹2,000, effective October 15, 2026. This fee is deducted from the merchant's settlement, not charged to the customer - consumers are not required to pay it, and it is not a tax or government levy.
What stays free
- All person-to-person UPI transfers remain completely free, regardless of amount.
- P2M transactions up to ₹2,000 remain free - this covers the overwhelming majority of small daily retail transactions.
- Small merchants receiving up to ₹1 lakh per month under the P2PM category remain at zero MDR - this is the carve-out that protects street vendors and very small shopkeepers.
- UPI Mandates and AutoPay transactions - recurring utility bills, subscriptions, and investment SIPs stays outside the MDR framework entirely.
How the charge is calculated
The MDR is a straightforward percentage of transaction value, deducted at settlement, with one cap to know about: for transactions of ₹75,000 and above, the MDR is capped at ₹300 per transaction, not 0.4% of the full amount.
The cap is the detail most explanations skip: once a transaction crosses roughly ₹75,000, the effective MDR rate actually starts falling as a percentage of transaction value, because the ₹300 ceiling doesn't scale with size. A ₹5 lakh UPI payment still only attracts ₹300 in MDR, an effective rate of 0.06%, not 0.4%.
What this means for you, depending on your business:
- Retail/kirana with ticket sizes mostly under ₹2,000 - negligible impact. Most of your volume stays untouched.
- Wholesale, B2B, or service invoicing with larger ticket sizes - this is where it matters. If you're invoicing clients ₹20,000 to ₹1,00,000+ via UPI regularly, budget for the deduction in your pricing or reconciliation, and check whether your accounting software's UPI settlement reconciliation is capturing the net (post-MDR) amount correctly rather than the gross invoiced amount - this is a common source of books not tying out after October 15.
- Micro-merchants under ₹1 lakh/month total UPI receipts - confirm with your acquiring bank that you're correctly classified under the P2PM exemption category, since misclassification would mean paying a fee you're actually exempt from.
One structural point worth knowing: 5% of total MDR collections are being routed into a dedicated fund to expand UPI adoption among small businesses - so part of what larger-ticket merchants now pay is explicitly earmarked to keep the ecosystem free for smaller ones.
Practical next step: if UPI settlement reconciliation currently flows straight into your books without a separate MDR expense line, that needs to be added before October 15 - otherwise your bank statements and your ledger will stop matching on every qualifying transaction.