Short answer: Under the Ministry of Finance framework announced for 15 October 2026, the merchant—not the customer—bears the merchant discount rate (MDR) on specified UPI person-to-merchant (P2M) payments. The general announced rate is 0.4% on qualifying payments above ₹2,000, capped at ₹300 for a payment of ₹75,000 or more. Certain sectors have a flat ₹5 rate, capital-market payments have a 0.02% rate capped at ₹300, and qualifying small P2PM merchants receiving up to ₹1 lakh a month through UPI QR remain at zero MDR. As of the official information dated 9 October 2026, these revised rates had been announced but had not yet taken effect.
What changes on 15 October 2026?
The Ministry of Finance and the Department of Financial Services announced a revised MDR framework for selected UPI person-to-merchant transactions. It is a change from the earlier position described in Central Board of Direct Taxes Circular No. 16/2020, which recorded that charges, including MDR, could not be imposed on prescribed electronic modes such as UPI and UPI QR from 1 January 2020.
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The new framework is not a blanket fee on every UPI payment. It applies according to the merchant’s account classification, transaction type and, for some categories, sector. A payment above ₹2,000 is therefore not enough by itself to determine whether a fee applies.
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The same release says UPI remains free for customers and that merchants must not pass the MDR to them. Banks have been advised to prevent such pass-through, while UPI app providers are not to impose platform or hidden fees for making UPI payments.
Who pays UPI MDR?
For a transaction covered by the announced framework, the merchant pays MDR through the acquiring and payment ecosystem. The deduction is handled between the merchant’s acquiring bank or payment provider and the other participants involved in processing and settling the transaction. It is not a government tax and is not an amount that the customer should see added to the bill.
What a customer should see
- The advertised price of the goods or service, with no separate “UPI charge” added because the customer selected UPI.
- A receipt or payment confirmation showing the amount paid to the merchant.
- No platform fee imposed by a UPI app merely for completing a normal UPI payment.
The government’s instruction concerns MDR. It should not be read as a ruling on every possible merchant service charge, such as an independently priced software subscription, rental, connectivity service or other disclosed business expense. A shop cannot relabel MDR as a customer surcharge, but a separate service contract must be assessed on its own terms.
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The following rates come from the 15 September 2026 Ministry of Finance and Department of Financial Services releases. They are announced rates, not rates already in force on 9 October 2026.
| Merchant or transaction category | Announced MDR | Important qualification |
|---|---|---|
| General specified P2M transactions | 0.4% | Applies to a qualifying transaction above ₹2,000; capped at ₹300 for a transaction of ₹75,000 or more. |
| Specified essential and thin-margin sectors | Flat ₹5 | For qualifying payments above ₹2,000. Named examples include railways, telecom, insurance, fuel and agricultural inputs; the exact merchant category must be confirmed. |
| Capital-market transactions | 0.02% | Capped at ₹300, according to the ministry releases. |
| Qualifying small P2PM merchants | Zero MDR | The government describes the tier as merchants receiving up to ₹1 lakh per month through UPI QR, subject to account classification and operating rules. |
The threshold, cap and category rules operate together. A merchant cannot assume that every payment over ₹2,000 receives the general 0.4% rate, and a customer cannot assume that a large payment creates a fee on the customer side.
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How the general rate is calculated
For a qualifying general-category merchant, 0.4% means four rupees for every ₹1,000 of the relevant transaction value, before applying the cap. The ministry’s FAQ gives these examples:
| Customer payment | Calculation at 0.4% | Merchant MDR |
|---|---|---|
| ₹3,000 | ₹3,000 × 0.004 | ₹12 |
| ₹50,000 | ₹50,000 × 0.004 | ₹200 |
| ₹75,000 or more | 0.4% would reach or exceed ₹300 | ₹300 maximum |
These are the ministry’s illustrations for the general category. A real merchant’s result depends on whether its acquiring account is classified in that category, whether a sector-specific rate applies and whether it qualifies for the small-merchant exemption.
Will a small shop or street vendor pay?
Not necessarily. The government says qualifying small merchants under the P2PM category retain zero MDR when their monthly UPI QR receipts are up to ₹1 lakh. The exemption is tied to the merchant’s account tier and monthly receipts, not simply to the size of one sale.
A single payment above ₹2,000
An individual ₹3,000, ₹10,000 or larger payment does not automatically remove the zero-MDR treatment if the merchant remains in an exempted account category. Conversely, a merchant should not assume that it qualifies merely because most of its individual payments are small. The acquiring bank or payment provider’s classification and the relevant monthly limit control the practical outcome.
If monthly receipts cross the limit
The announced FAQ indicates that the merchant’s overall account classification matters and that detailed implementation and fund arrangements were to be finalized in consultation with the Reserve Bank of India. Before 15 October, a small business should ask its acquiring bank or payment provider how crossing the ₹1 lakh monthly threshold will be handled, when a category change takes effect and how any deduction will appear on statements.
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Which sectors receive the flat ₹5 rate?
The PIB release identifies railways, telecom, insurance, fuel and agricultural inputs as examples of essential or thin-margin sectors receiving a flat ₹5 MDR on qualifying payments above ₹2,000. The Department of Financial Services FAQ describes flat-₹5 treatment for several sectors and public utilities.
Because the releases do not replace the merchant’s formal category assignment, a business should not apply the ₹5 figure solely because it sells an item that seems essential. The acquiring bank assigns the merchant category code (MCC), and the final operating rules determine which category is used for MDR. A fuel outlet, utility counter or other named-sector business should obtain written confirmation of its classification and rate.
What does “P2M” or “P2PM” mean?
P2M means person-to-merchant: a consumer pays a business. P2PM is the small-merchant category used in the announced framework. The terms matter because UPI person-to-person transfers are treated differently from selected merchant payments.
The ministry states that UPI continues to remain free for peer-to-peer transactions. The announced MDR framework concerns specified merchant transactions, not an ordinary transfer between two individuals. A business accepting payment for goods or services should nevertheless use a properly classified merchant account rather than treating commercial receipts as personal transfers.
How a merchant accepts UPI
NPCI’s merchant FAQ says a merchant works with an acquiring bank for UPI infrastructure. The acquirer assigns the merchant category code and supports one or more acceptance modes:
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- QR: the customer scans a static or dynamic QR code.
- Intent: a payment request opens a compatible UPI app.
- App-based acceptance: payment is initiated within the merchant’s or provider’s application.
- Collect: the merchant sends a payment request for the customer to approve.
Settlement timing follows the merchant agreement with the acquirer or provider. Transaction complaints should normally be raised with the acquiring bank first.
Is a soundbox required?
No. NPCI’s documented acceptance modes do not make a soundbox a prerequisite. A QR arrangement is the core acceptance method; a soundbox is an optional device that announces incoming payments. The Department of Financial Services annual report recorded 1,04,69,546 soundbox devices deployed nationally as of 30 November 2025, showing widespread use of the device category but not proving that any particular model is necessary or suitable.
A merchant considering one should compare the purchase price, rental or service fee, compatibility with its acquirer, language and volume settings, warranty and support. Those device costs are separate from MDR.
What small merchants should check before the start date
- Confirm the account type. Ask whether the QR is classified as P2PM or another P2M category and request the assigned MCC.
- Verify the rate in writing. Ask which MDR will apply from 15 October 2026, including any sector-specific flat rate or zero-MDR exemption.
- Check the monthly-receipt rule. If the business relies on the up-to-₹1-lakh P2PM tier, ask how receipts are measured and what happens when the limit is crossed.
- Inspect settlement statements. Find out whether MDR appears as a separate line, how refunds and reversals are treated and when net funds reach the bank account.
- Confirm customer billing rules. Do not add a UPI surcharge or describe MDR as a tax. Escalate any provider instruction that conflicts with the government’s no-pass-through position.
- Record support channels. Keep the acquiring bank’s complaint route, escalation contacts and transaction reference numbers accessible.
How much of UPI commerce is affected?
The PIB release estimates that approximately 96% of P2M merchant transactions will remain unaffected and that the fee will apply to about 4% of merchant transactions. The Department of Financial Services separately says more than 95% of P2M transaction volume is at or below ₹2,000. These are not identical statistics: one is the PIB estimate of transactions unaffected, while the other describes the share of transaction volume at or below a threshold. They should not be merged into one percentage.
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Small-merchant support fund
The Ministry of Finance says a dedicated fund equal to 5% of total MDR collections will support UPI adoption among small merchants. The FAQ describes a proposed small-merchant fund and says its detailed framework is to be finalized with the Reserve Bank of India within three months.
The announcement does not establish an application process, individual merchant entitlement, payment date or guaranteed reimbursement. Merchants should treat the fund as a policy mechanism under development, not as money that can be counted in current cash-flow planning.
What to do if a shop adds a “UPI fee”
First, ask the merchant to show whether the amount is being presented as a UPI surcharge. The government’s announced framework says MDR cannot be passed to the customer. Keep the bill, payment screenshot and transaction reference.
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Next, contact the merchant’s acquiring bank or payment provider using the details displayed on the QR or receipt. If the issue concerns a payment failure, duplicate debit or refund, use the normal UPI dispute route as well. The fact that a merchant has another legitimate operating expense does not turn that expense into MDR; the description and contractual basis of the charge matter.
Bottom line for merchants and customers
From 15 October 2026, selected UPI P2M payments may create an MDR deduction inside the merchant payment ecosystem. The announced default is 0.4% above ₹2,000, capped at ₹300 from ₹75,000, with special ₹5, 0.02% and zero-MDR categories. Qualifying small P2PM merchants can remain exempt at up to ₹1 lakh of monthly UPI QR receipts, but account classification and final operating rules decide the result. Customers are not supposed to pay MDR, and a shop should not add it to the bill as a UPI fee.
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