Small businesses in India can accept UPI payments with zero merchant discount rate (MDR) when their acquiring account is correctly classified as a micro-merchant under the Person-to-Person-Merchant (P2PM) framework and receives no more than ₹1 lakh per month through a UPI QR directly into the merchant’s account. A single payment above ₹2,000 does not by itself remove that exemption.
If the account is standard Person-to-Merchant (P2M), payments up to ₹2,000 carry no MDR under the framework that took effect on 15 October 2026. Above ₹2,000, the ordinary rate is 0.4%, subject to a ₹300 cap for payments of ₹75,000 or more. The merchant’s category code matters, and provider charges such as settlement services, onboarding, GST or optional notification hardware are separate questions.
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What “zero MDR” actually means
MDR is the merchant discount rate associated with processing a digital payment. It is a cost charged on covered merchant transactions, not a fee that a customer may be asked to add to a UPI payment. The Department of Financial Services (DFS), Ministry of Finance, says consumers remain uncharged and merchants must not pass MDR through as an additional UPI fee.
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Zero MDR therefore is not a feature of a printed QR code or a particular standee. It depends on the account’s merchant classification, the way funds settle, the merchant’s monthly receipts and, for some businesses, the category code assigned by the acquiring bank or payment provider.
Which businesses can remain in the P2PM zero-MDR tier?
Meet the P2PM receipt limit
The DFS FAQ describes small local vendors operating under P2PM as continuing with zero MDR when they receive up to ₹1 lakh per month through UPI QR directly into their own account. The limit is a monthly receipts condition, not a maximum value for every individual sale.
An individual payment above ₹2,000 is not automatically disqualifying
A P2PM merchant can receive a payment above ₹2,000 without incurring MDR merely because of that payment. The account must still satisfy the P2PM conditions and remain within the ₹1 lakh monthly threshold. Ask the acquiring provider how it measures the threshold, what reporting period it uses and what happens if receipts rise above it.
Classification must be confirmed by the provider
Do not infer P2PM status from the size of your shop, a self-declared business type or the appearance of your QR. Request written confirmation of the account’s P2PM or P2M classification, the merchant category code and the date on which the classification takes effect. If the provider cannot explain how it monitors the monthly limit, treat the zero-MDR assumption as unverified.
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2026 UPI MDR rates at a glance
The following treatments are the rates and categories stated in the DFS FAQ. They apply from 15 October 2026, so confirm that your provider’s statement and settlement reports have been updated.
| Situation | Treatment under the DFS FAQ | What the merchant should check |
|---|---|---|
| P2PM micro-merchant receiving up to ₹1 lakh per month through UPI QR directly into the account | Zero MDR, including an individual receipt above ₹2,000 while the merchant remains eligible | Written P2PM classification and threshold-monitoring method |
| Standard P2M payment up to ₹2,000 | No MDR under the revised framework | That the account is being billed under the current framework, not an older schedule |
| Standard P2M payment above ₹2,000 | 0.4%; capped at ₹300 for a payment of ₹75,000 or more | Merchant category, fee line on the settlement statement and cap application |
| Specified essential or special category above ₹2,000 | Flat ₹5 per transaction | Correct category-code mapping with the acquirer |
| Capital-market transaction | 0.02%; capped at ₹300 | Whether the transaction is genuinely classified as capital-market activity |
More than 95% of UPI P2M transaction volume is at or below ₹2,000, according to the DFS FAQ. That is why the revised framework leaves the majority of low-value payments unaffected, but it does not make every merchant account free for larger transactions.
Special categories that do not use the ordinary 0.4% rate
The FAQ lists a flat ₹5 fee per transaction above ₹2,000 for specified categories. They include fuel, utilities, telecom, insurance, education, railways, agriculture inputs, government payments, tolls, wallet top-ups and debt collection. Capital-market transactions have the separate 0.02% rate with a ₹300 cap.
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How to set up and verify a zero-MDR payment flow
- Choose an acquiring bank or merchant payment provider. Before displaying a QR, ask whether it supports P2PM onboarding for your business type and which account receives the settlement.
- Submit accurate business information. Provide the legal name, trading name, bank-account details, address, tax information where requested and a description that matches the goods or services you actually sell. Inconsistent information can lead to a different category code.
- Ask for the classification in writing. Obtain the account’s P2PM or P2M designation, merchant category code, effective date and the monthly-receipt rule that applies. Save the onboarding email, agreement or dashboard screenshot.
- Confirm direct settlement. For the P2PM exemption, receipts must go through the UPI QR directly into the merchant’s account described by the framework. Ask whether a wallet, intermediary balance or pooled settlement changes the treatment.
- Display the assigned QR and run a controlled test. Make a small payment, verify the payer name and merchant account, and check the settlement entry. Test again after any account, bank or provider change.
- Read the first complete settlement statement. Look for the gross amount, MDR, GST, refunds, chargebacks, settlement date and any service or device line. A zero-MDR result does not necessarily mean every line on the statement is zero.
- Track monthly receipts. Keep a simple ledger of UPI collections by calendar or provider-defined month. Alert yourself before ₹1 lakh if you rely on P2PM status, and ask the provider what formal notification is issued when the threshold is exceeded.
- Escalate discrepancies promptly. Send the provider the transaction IDs, statement date, classification confirmation and the exact fee line. Request a written explanation and correction where the billed treatment conflicts with the agreed category.
QR stands, stickers and sound notifications do not change MDR
The DFS FAQ says existing QR stands do not need to be replaced. A physical standee or sticker is only a way to present the merchant’s existing QR; it cannot convert a P2M account into P2PM or remove a fee. Provider guidance from Google Pay for Business likewise says its QR standees and stickers continue to work.
Audio notification hardware is a separate purchasing decision. The same provider describes its SoundPod as a rental subscription, so a merchant should ask about recurring rental, replacement, tax and cancellation terms. Do not treat a notification device as evidence of a fee exemption, and do not assume that an optional device is available or free from every provider.
Provider charges can exist even when MDR is zero
Regulatory MDR treatment and a provider’s commercial schedule are different layers. Ask specifically about:
- onboarding or verification charges;
- settlement, reconciliation or statement fees;
- GST and other applicable taxes;
- optional sound-alert devices or other hardware rentals;
- refund, chargeback or dispute-handling fees; and
- support terms and any minimum-volume condition.
For example, India Post Payments Bank’s posted MDR page lists UPI at 0% for small merchants with turnover up to ₹20 lakh in the prior financial year and for other merchants. Its table also states that GST applies as applicable and directs merchants to contact the bank for customised pricing on some services. Those are that provider’s posted terms, not a guarantee that every bank or payment provider offers the same package. Compare the written schedule, settlement timing and support quality before signing up.
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What happens when your business is not P2PM?
Low-value standard P2M sales
If your account is standard P2M, payments up to ₹2,000 have no MDR under the framework effective 15 October 2026. This protection is not limited to P2PM micro-merchants, so do not describe all zero-fee UPI acceptance as a P2PM benefit.
Larger standard P2M sales
For a standard P2M payment above ₹2,000, the ordinary rate is 0.4%. A ₹10,000 payment would produce a ₹40 MDR before any applicable tax treatment shown by the provider. At ₹75,000, 0.4% equals ₹300, and the FAQ caps the fee at ₹300 for payments at or above that amount. Check how the provider displays the calculation and whether your category is one of the listed exceptions.
Do not add a “UPI fee” to the customer’s bill
The official FAQ says UPI consumers remain uncharged and merchants may not pass MDR through as an additional UPI charge. Build any merchant-side cost into your general pricing and accounting instead of adding a separate surcharge at checkout.
Keep records that prove your treatment
Retain the onboarding approval, merchant category code, monthly UPI totals, settlement reports, invoices for provider services and correspondence about threshold reviews. Reconcile the QR’s displayed business name with the bank account receiving funds. If you use more than one QR or provider, maintain separate totals so that you can explain which account received each payment.
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When a provider changes your classification, ask for the reason, effective date and appeal route. A change in ownership, bank account, business activity or settlement arrangement can alter the applicable treatment even when the QR image looks identical. Never destroy earlier statements: they are the evidence needed to challenge a retrospective fee or demonstrate when your status changed.
Do not confuse government incentives with zero MDR
The government has also used incentives to support low-value BHIM-UPI P2M payments. A 19 March 2025 Ministry of Finance release described a 0.15% incentive for qualifying small-merchant BHIM-UPI P2M transactions up to ₹2,000 under the FY2024–25 scheme. That incentive was paid through acquiring banks and shared with ecosystem participants; it was not a discount that a merchant could simply subtract from an MDR invoice.
The same release reported government incentive payouts of ₹1,389 crore in FY2021–22, ₹2,210 crore in FY2022–23 and ₹3,631 crore in FY2023–24. Those historical programme totals explain how the ecosystem was supported, but they do not change the 2026 P2PM threshold or the rates on a merchant’s current statement.
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- Am I onboarded as P2PM or standard P2M?
- What is my merchant category code, and which DFS rate applies to it?
- Does the P2PM ₹1 lakh limit apply to this account, and how is the month measured?
- Does settlement go directly to my account?
- Which charges besides MDR can appear, including GST and optional hardware?
- Where can I download itemised settlement statements?
- Who handles a wrongly applied fee, and what evidence do they require?
The practical route to avoiding MDR is therefore narrow but clear: secure the correct P2PM classification if you genuinely qualify, keep monthly UPI receipts within the stated limit, and verify the treatment in writing. If you do not qualify, use the ₹2,000 low-value rule, the applicable category exception or a provider whose separate commercial charges fit your business—without imposing a prohibited customer surcharge.
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