New UPI framework explained: P2P free, MDR of 0.4% on merchant payments above ₹2,000
Synopsis
India's new UPI framework does not touch ordinary users — all P2P payments remain free with zero caps. The MDR of 0.4% kicks in only on merchant transactions above ₹2,000, covering just 4% of such payments. A new merchant adoption fund, fed by 5% of MDR collections, signals a pivot toward making UPI financially sustainable without taxing consumers.
Key Takeaways
All UPI person-to-person (P2P) transactions remain completely free, with no caps or volume limits .
A 0.4% MDR applies only to merchant (P2M) transactions above ₹2,000 ; capped at ₹300 for transactions of ₹75,000 and above .
Approximately 96% of all P2M transactions will remain unaffected by the new MDR structure.
Essential sectors including railways, telecom, insurance, fuel, and agri-inputs will attract a flat MDR of just ₹5 per transaction above ₹2,000.
Customers cannot be charged MDR — banks must ensure merchants do not pass it on; UPI apps are banned from levying hidden fees.
A new fund receiving 5% of total MDR collections will promote UPI adoption among small merchants in rural and semi-urban areas.
The new UPI framework will have no impact on person-to-person (P2P) transactions, which will remain completely free irrespective of the amount transferred, according to an explainer issued by the Finance Ministry on 15 September 2026. The clarification comes amid widespread public concern over whether ordinary users will be charged for everyday digital payments.
What Remains Free
Payments to merchants up to ₹2,000, along with all transactions covered under the zero-MDR framework for small merchants, will continue to attract no charge. According to the Finance Ministry, approximately 96 per cent of all person-to-merchant (P2M) transactions will remain unaffected by the new structure. Individuals retain unlimited free usage with no monthly quotas, volume restrictions, or tiered caps on UPI transactions.
How MDR Will Apply to Merchant Transactions
A Merchant Discount Rate (MDR) of 0.4 per cent will apply only to P2M transactions above ₹2,000. For transactions of ₹75,000 and above, the MDR will be capped at ₹300 per transaction. The Finance Ministry was explicit that MDR is neither a tax nor a government levy — it is distributed among payment ecosystem participants, including banks and payment application providers, to fund the operation and expansion of the UPI infrastructure.
Transactions above ₹2,000 in essential and thin-margin sectors — including railways, telecommunications, insurance, fuel, and agricultural inputs — will attract a flat MDR of just ₹5 per transaction, providing cost certainty for critical public services and businesses operating on narrow margins. Payments relating to mutual funds, securities, stockbrokers, and dealers will attract an MDR of 0.02 per cent, capped at ₹300 per transaction, to support continued retail participation in formal financial markets.
Protections for Customers and Small Merchants
The MDR is a charge within the merchant payment ecosystem and is explicitly not a charge on customers making UPI payments. Banks have been advised to ensure that merchants do not pass MDR charges on to end users. UPI application providers are expressly prohibited from imposing platform fees or hidden charges of any kind.
Notably, the daily transaction limits prescribed by banks and the National Payments Corporation of India (NPCI) — generally ranging from ₹1 lakh to ₹5 lakh depending on transaction category — are security and risk-management safeguards, not charging thresholds.
New Fund to Support Small Merchant Adoption
A dedicated fund will be established to promote UPI adoption among small merchants. An amount equivalent to 5 per cent of total MDR collections will be contributed to this fund, which will support wider UPI acceptance, sustained usage, and the inclusion of small businesses in India's digital payments ecosystem. Revenue from larger merchant transactions will also be channelled toward expanding payment infrastructure, including in rural and semi-urban areas.
The framework is designed to protect individuals, micro-enterprises, and small businesses while introducing a limited, structured charge on larger merchant transactions — a balance the Finance Ministry says is essential for the long-term viability of India's payments ecosystem.
Point of View
But the real structural shift is that MDR is now formally back in the UPI ecosystem after being abolished for large merchants in 2020. Whether banks and payment providers will absorb the charge entirely — or find indirect ways to pass it on — will be the true test of the consumer-protection guardrails. The 5% merchant adoption fund is a thoughtful inclusion, but its governance structure and disbursement mechanism remain undefined, leaving its effectiveness an open question.
NationPress
15 Sept 2026
Frequently Asked Questions
Will UPI payments become chargeable for regular users?
No. All person-to-person UPI transactions remain completely free with no caps, quotas, or volume limits. The new MDR applies only to certain merchant transactions above ₹2,000 and is a charge on merchants, not on customers making payments.
What is MDR and who pays it under the new UPI framework?
MDR, or Merchant Discount Rate, is a fee shared among payment ecosystem participants — banks, payment service providers, and UPI app providers — to fund infrastructure. It is not a government tax. Under the new framework, it applies only to merchant transactions above ₹2,000 at a rate of 0.4%, capped at ₹300 for transactions of ₹75,000 and above.
Which sectors get a lower or flat MDR under the new rules?
Essential and thin-margin sectors — including railways, telecommunications, insurance, fuel, and agricultural inputs — will attract a flat MDR of ₹5 per transaction above ₹2,000. Mutual funds, securities, and stockbroker transactions will attract 0.02% MDR, capped at ₹300.
How many UPI merchant transactions are actually affected by the new MDR?
According to the Finance Ministry, approximately 96% of all person-to-merchant (P2M) UPI transactions will remain unaffected because they fall below the ₹2,000 threshold or are covered under the zero-MDR framework for small merchants.
What is the new merchant adoption fund and how will it work?
A dedicated fund will receive an amount equivalent to 5% of total MDR collections. It is designed to promote UPI acceptance and sustained usage among small merchants, particularly in rural and semi-urban India, though the detailed governance and disbursement mechanism have not yet been announced.
