In August 2026, UPI processed a record 24.51 billion transactions worth INR 29.82 trillion
The Ministry of Finance’s decision to introduce a new Merchant Discount Rate (MDR) on the national digital payments system UPI has raised concerns over who will ultimately bear the cost. While the government says consumers will not be charged directly, concerns remain that merchants are very likely to pass the additional cost on through higher prices. As often happens when new costs enter the system, the ultimate burden is always on the consumers to bear.
The announcement of the imposition of MDR after over two decades since UPI was launched, has put a new question before businesses and consumers: who ultimately bears the cost?
As has become the tradition under the current dispensation, instead of a clear announcement of the introduction of the MDR on a service that has remained free since its launch, the government published the introduction of the fee in its official gazette.
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When the news spread, the government said that the MDR is a charge within the merchant-payment ecosystem, not a fee that consumers are required to pay for using UPI. The Ministry of Finance said that it has advised banks to ensure that merchants do not pass the MDR on to customers, while UPI providers have been barred from imposing platform or hidden charges on users.
For consumers, the distinction, at least on paper, matters. A customer paying INR 10,000 to an eligible merchant through UPI does not become liable for an additional INR 40 merely because the transaction crosses INR 2,000. The 0.4 pc MDR is applied within the payment ecosystem. At the same time, merchants are now preparing for a cost that did not exist under the previous zero-MDR model.
For a INR 10,000 transaction, 0.4 pc works out to INR 40. At INR 50,000, it is INR 200. At INR 75,000, the charge reaches the INR 300 ceiling. Any eligible transaction above INR 75,000 will also carry a maximum MDR of INR 300.
Despite the government’s say so, small businesses are already preparing to pass on the additional charge to the consumer.
“I understand that the MDR is not supposed to be recovered from the customer. But for a small business, even a few hundred rupees in payment costs can matter when margins are low. I will have to see how much of my monthly UPI collection falls under the new rules. UPI has become a regular part of our daily collections because customers find it convenient and businesses do not have to handle as much cash. We will have to look at our transaction volumes and margins before we know how much of an impact this will have on us,” Sahil Choudhary, Manager at Munafa Mart, Delhi, tells Media India Group.
The framework, however, does not cover all merchants in the same way. Small merchants receiving up to INR 100,000 a month through UPI QR codes under the specified small-merchant category will continue to receive zero-MDR treatment. Street vendors, neighbourhood shops and other small businesses covered by this provision will therefore not face the new charge on their UPI receipts as long as their volumes stay below the threshold.
NPCI says the structure is designed to keep small-value and small-merchant payments free while introducing MDR only for specified higher-value merchant transactions. Around 96 pc of all transactions involving a merchant are expected to remain unaffected. Payments up to INR 2,000 will continue to be free, while all person-to-person transactions will remain free irrespective of the amount.
That means a customer buying groceries for INR 1,500 from a regular eligible merchant will not face MDR. A customer paying INR 5,000 for a product or service through an eligible merchant transaction will fall into the new MDR framework, but the charge is imposed on the merchant side rather than on the customer.
There are also sector-specific rates. Transactions above INR 2,000 in sectors including railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat MDR of INR 5 rather than the standard 0.4 pc. Capital-market transactions will attract an MDR of 0.02 pc, capped at INR 300.
The change comes at a time when UPI has reached a scale that few payment systems have matched. In August 2026, UPI processed a record 24.51 billion transactions worth INR 29.82 trillion. That works out to about 791 million transactions a day, with an average daily value of about INR 962 billion.
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RBI payment-system data shows cash withdrawals at ATMs remain a large part of the payments ecosystem. However, there is no single official figure for the total value of all cash payments made across shops, markets and other businesses each day, as cash transactions are not recorded through a central payment network in the same way as UPI transactions.
The continued presence of cash means that the cost of digital payments is not simply a question of replacing one payment method with another. For merchants, UPI has become part of day-to-day collections, particularly for businesses that do not want to handle large amounts of physical cash.
For consumers, however, the announcement has created confusion because the word “charge” appears alongside a payment method that has been marketed for years as free.
“I have been using UPI regularly because it is convenient and I do not have to carry cash. But since I heard about this new charge, I am in doubt about whether merchants will eventually make us pay for it. I am 100 pc sure that some merchants will try to charge customers extra because this has always been the case in some form. Whenever there is a new cost somewhere in the system, ordinary people end up paying for it. If I make a payment above INR 2,000, I do not want to suddenly be told that I have to pay extra because I chose UPI. If the government says the charge is on the merchant and not the consumer, then merchants should not pass it on to us,” Seema Bhan, a gym trainer in Delhi, tells Media India Group.
For merchants, the economics will vary according to the size and nature of their business. A retailer receiving INR 100,000 a month through eligible high-value UPI transactions would face a very different impact from a business receiving several lakh rupees through such payments. The new framework also means that merchants have to understand which transactions qualify, which are exempt and how their payment provider will account for the MDR.
Some businesses may also look at cash as an alternative for higher-value transactions.
“If the new system means that merchants have to bear an additional cost on higher-value UPI transactions, I would rather accept cash for those payments. That way the customer also knows exactly how much he has to pay and we do not have to worry about an additional payment-related cost. Customers are already confused after hearing that UPI will have a charge. If they come to the counter and ask whether they have to pay extra, it creates another issue for us. With cash, there is no such confusion. We will have to see how the system works from October, but if accepting UPI on higher-value transactions means an additional cost for the business, cash becomes a simpler option,” Rajdeep Singh, a salesman at Cafe Coffee Day in Saket Delhi tells Media India Group.
The change also puts UPI’s cost structure in context. NPCI has said the new MDR remains below typical card-processing costs. Standard credit-card MDRs generally range between 1.5 pc and 2.5 pc, while debit-card MDRs can be as high as 0.9 pc, according to NPCI’s explanation of the new framework.
For now, the immediate issue is therefore not whether UPI has become a paid service for consumers. It has not. Person-to-person transfers remain free, payments up to INR 2,000 remain free and small merchants covered by the zero-MDR framework remain protected.
The more immediate question is how merchants adjust to the new cost and whether consumers see any change in the final price of goods and services despite the rule that MDR should not be passed on to them.
