ENDING nearly six years of a fully free Unified Payments Interface (UPI) network for merchants, the Government on Tuesday introduced a 0.4 per cent transaction fee on payment above Rs 2,000, capped at Rs 300 for payments of Rs 75,000 and above, from October 15, while explicitly ring-fencing everyday person-to-person transfers from any charge. “Charges will apply only to person-to-merchant (P2M) transactions exceeding Rs 2,000,” the Finance Ministry said in a statement. “A nominal merchant discount rate (MDR) of 0.4 per cent will be levied on P2M transactions above Rs 2,000.This commission will be shared amongst the payment ecosystem partners including banks and app providers.” Essential and thin-margin sectors - railways, telecom, insurance, fuel and agricultural inputs - will pay a flat MDR of Rs 5 per transaction above Rs 2,000, intended to keep costs predictable for critical services; these categories account for nearly 17 per cent of P2M transaction volume but roughly 46 per cent of P2M transaction value. The same flat-fee treatment extends to Government utility bill collection (electricity, water, piped gas) and educational fee payments such as school tuition and university fees above Rs 2,000, both similarly exempted below that threshold. Payments into mutual funds, securities and through stockbrokers and dealers will attract a lighter 0.02 per cent MDR, capped at Rs 300 - a rate designed to keep the cost of investing low and encourage retail participation in formal financial markets. The Government has also moved to prevent the new charges from being quietly passed on to consumers: UPI app providers are barred from levying platform fees or hidden charges, and banks have been directed to ensure merchants do not pass MDR costs on to customers. Also, there will be no monthly quotas or volume limits for free UPI transactions for individuals.

 

The framework layers different rates across categories of transactions rather than applying a blanket charge. On a Rs 3,000 purchase, the 0.4 per cent rate works out to a Rs 12 fee paid by the merchant to its acquiring bank; on a Rs 50,000 purchase, it comes to Rs 200. On a Rs 1,00,000 purchase, the percentage calculation would otherwise total Rs 400, but the fixed Rs 300 ceiling applies instead - a structure designed to keep high-value transaction costs predictable. The MDR applies only to direct user-account-to-merchant-account UPI payments; credit-linked transactions such as RuPay Credit Cards on UPI or pre-sanctioned credit lines follow separate card rules, and automated recurring payments - UPI Mandates or AutoPay used for utility bills, OTT subscriptions and recurring investments - carry no MDR at all. Small merchants remain the most protected category. Vendors receiving up to Rs 1 lakh a month via UPI QR codes - classified under a Person-toPerson-Merchant (P2PM) framework - will continue to pay zero MDR on all transactions, with no requirement to register for GST or upgrade existing QR infrastructure. The carefully calibrated move signals the end of an era for the world’s largest real-time payments system even as the Government tries to avoid alarming the hundreds of millions of users who use it daily. Person-to-person (P2P) transfers - which make up 37 per cent of UPI’s transaction volume and 70 per cent of its transaction value - will continue to attract zero charges, irrespective of size. Small-value transactions up to Rs 2,000, which the Government said account for more than 95 per cent of total P2M volume, remain untouched. Acquiring banks will track inward payments via a velocity check, and merchants exceeding Rs 1 lakh a month for three consecutive months move into the standard P2M category.

 

Zero MDR under this framework also extends to rural and semi-urban QR payments, an area the Government has flagged as a core policy priority. Overall, Government data analysis suggests only about 4 per cent of merchant transactions will actually be touched by the new MDR, since most fall below the Rs 2,000 threshold or qualify for the P2M exemption. Officials argue merchants typically absorb such processing costs as a standard operational overhead, offset by higher transaction volumes. Existing daily transaction limits of Rs 1-5 lakh, the Government stressed, remain purely risk-management tools rather than a backdoor charge structure. “UPI app providers are explicitly prohibited from levying platform fees or hidden charges,” the statement said. “Banks have been advised to ensure that merchants do not pass MDR charges to customers for UPI payments.” Importantly, there will be no monthly quotas, volume limits, or tiered caps on free UPI transactions for individuals. “Daily transaction limits enforced by banks and NPCI (Rs 1-5 lakh depending on category) are purely risk-management measures, not commercial charge tiers,” it said.