New UPI Charge From October 15: What Is Merchant Discount Rate And How Will It Work?

Starting October 15, a Merchant Discount Rate (MDR) of 0.4% will be levied on person-to-merchant (P2M) UPI transactions exceeding Rs 2,000. This new framework by NPCI aims to create a revenue stream for the payment ecosystem, with specific rates for different sectors and exemptions for small vendors and person-to-person transfers.

A Merchant Discount Rate (MDR) will be implemented for certain payments made to companies in UPI transactions starting on October 15. According to the most recent announcement from NPCI, the new framework would levy an MDR of 0.4% on person-to-merchant (P2M) UPI transactions above Rs 2,000.

What Is Merchant Discount Rate?

MDR is a processing fee that is applied to digital payments that retailers accept. It is often subtracted from the amount that the merchant receives and is computed as a percentage of the transaction value. Banks and UPI app providers are among the parties engaged in payment processing that get the charge.

Under the new framework, the 0.4% rate will have a maximum limit of Rs 300 for eligible merchant payments of Rs 75,000 or more. However, the new charge will not apply to person-to-person (P2P) transfers, which will remain free regardless of the amount sent. The government has also created separate rates for specific categories. Payments above Rs 2,000 in sectors such as railways, telecom, insurance, fuel and agricultural inputs will attract a flat Rs 5 MDR. Transactions involving mutual funds, securities, stockbrokers and dealers will carry a 0.02% MDR, capped at Rs 300. Small vendors covered under the P2PM framework will continue to be exempt from MDR.

UPI merchant payments have traditionally operated without a transaction fee, with the government supporting the digital-payments ecosystem through incentive schemes. The new framework seeks to create a revenue stream for the payment ecosystem while continuing to keep UPI free for consumers.

What Did Finance Ministry Say?

The Finance Ministry said, “Data analysis indicates that only 4 percentage of merchant transactions will be impacted by the MDR introduction, as the majority of transactions fall below the Rs 2,000 threshold or qualify under the zero-MDR P2PM framework. This ensures that micro and small businesses remain shielded from cost burdens."

Banks have also been advised not to allow merchants to pass the MDR cost on to customers.