By: CA  Anil K. Jain   

Chartered Accountant | Economist | Policy Researcher | Author           
President – Ahimsa Foundation India  Email: CAINDIA@HOTMAIL.COM

India’s digital payments revolution has entered an important new phase. The Unified Payments Interface (UPI), which has transformed the way Indians transfer money and pay merchants, has grown from a financial-technology innovation into a critical part of the country’s economic infrastructure. From street vendors and neighbourhood grocery stores to e-commerce platforms, hospitals, fuel stations and large retailers, the familiar UPI QR code has become almost ubiquitous.

The latest policy development is therefore economically significant. On 15 September 2026, the Government announced a new Merchant Discount Rate (MDR) framework for selected UPI merchant transactions. The change is carefully targeted: ordinary consumers will continue to make UPI payments without transaction charges, person-to-person transfers remain free, small payments remain outside MDR, and small merchants receive special protection. MDR will instead apply primarily to certain higher-value merchant payments. The change represents an attempt to resolve one of the central questions surrounding India’s digital-payment success: who should ultimately pay for maintaining and expanding a payment network that consumers have come to regard as free?

The Extraordinary Rise of UPI

UPI was launched in 2016 by the National Payments Corporation of India (NPCI) as an interoperable, real-time bank-to-bank payment system. Its simplicity, instant settlement experience and QR-based merchant acceptance helped it spread rapidly across the country.

The scale reached by 2026 is remarkable. According to NPCI data, UPI processed 24.51 billion transactions in August 2026, worth approximately ₹29.82 lakh crore. In July 2026, it had processed about 23.66 billion transactions worth nearly ₹29.88 lakh crore. The number of banks live on UPI increased to 752 in August 2026, compared with 713 in April. 

Government data also show the longer-term transformation. As of June 2026, approximately 55.49 crore users had been onboarded onto UPI. The Government reported UPI transaction volume of about 24,162 crore transactions during FY2025-26, with a total value of approximately ₹314 lakh crore. 

UPI’s importance extends beyond the payment industry. It has helped formalise transactions, reduced dependence on cash, lowered barriers to digital acceptance for small merchants and contributed to financial inclusion. A 2026 government report noted that digital transactions increased nearly eleven-fold between 2021 and 2025, while UPI’s share of total digital transactions rose to around 80%. 

UPI has also become an important component of India’s international digital diplomacy. By August 2026, the Government stated that UPI was live in 11 foreign countries, while additional countries had expressed interest in the system. 

What Exactly Is MDR?

Merchant Discount Rate, or MDR, is the charge associated with processing a merchant’s digital payment. Despite its name, it is not a discount given to a customer. Nor, under the new UPI framework, is it a tax collected by the Government. Instead, MDR provides revenue to participants in the payment ecosystem, including banks, payment-service providers and UPI application providers, helping meet the costs of processing transactions and maintaining payment infrastructure. 

India had adopted zero MDR for UPI and RuPay debit-card transactions from January 2020. This was an important policy tool for encouraging merchants to accept digital payments because accepting UPI did not involve the transaction charges normally associated with card payments. But zero MDR also created an economic challenge. Payment infrastructure is not actually costless. Banks and payment companies must maintain servers and networks, invest in cybersecurity, fraud prevention and dispute-resolution systems, process enormous transaction volumes and continuously improve resilience.

The question therefore became whether government incentives alone should continue to support the ecosystem or whether larger commercial transactions should contribute directly towards its costs.

What Has Changed?

Under the framework announced on 15 September, all person-to-person (P2P) UPI transactions will remain free irrespective of value. There will be no transaction fee, platform fee or similar charge on individuals sending or receiving money. For merchant payments, transactions of up to ₹2,000 will also remain free of MDR. The principal change concerns person-to-merchant, or P2M, transactions above ₹2,000. These will generally attract an MDR of 0.4%.

Thus, a qualifying merchant transaction of ₹5,000 would generate an MDR of ₹20, while a ₹10,000 transaction would generate ₹40. There is also an important ceiling. For transactions of ₹75,000 or more, MDR is capped at ₹300 per transaction. Special rates have been created for economically sensitive sectors. Transactions above ₹2,000 in sectors such as railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat MDR of only ₹5 per transaction. This recognises that many such sectors operate on relatively thin margins or provide essential services. Capital-market payments—including specified transactions relating to mutual funds, securities, stockbrokers and dealers—will have an MDR of 0.02%, capped at ₹300. 

Protection for Small Merchants

One of the most significant aspects of the policy is its treatment of small businesses. Small merchants, including street vendors, receiving up to ₹1 lakh per month through UPI QR codes under the Person-to-Person-Merchant or P2PM framework will continue to enjoy zero MDR on qualifying transactions.  The Government estimates that only about 4% of merchant transactions will attract MDR, meaning roughly 96% of P2M transactions will remain unaffected because they either fall below the ₹2,000 threshold or are covered by protections for small merchants.  This distinction is crucial. A vegetable vendor, tea stall, small kirana shop or street vendor is economically very different from a large supermarket chain or major online retailer. Applying identical payment charges to both could discourage digital acceptance at the bottom of the economic pyramid. The framework therefore attempts to retain UPI’s financial-inclusion character while obtaining revenue from the comparatively small proportion of higher-value commercial transactions.

Will Consumers Have to Pay?

For ordinary users, this is perhaps the most important question. The Government says no. MDR is designed as a charge within the merchant-payment ecosystem, not as a transaction charge on the consumer. Banks have been advised to ensure that merchants do not pass MDR charges on to customers, while UPI application providers are prohibited from imposing platform fees or hidden transaction charges under this framework. Consequently, a person paying ₹500 at a grocery store, ₹1,500 at a restaurant or transferring ₹25,000 to a family member should not suddenly face a UPI transaction fee because of the new MDR arrangement. This distinction is vital because UPI’s success has been based partly on the perception that it is instant, simple and free to the consumer.

Why Introduce MDR Now?

The central economic argument concerns the long-term sustainability of the UPI ecosystem.At UPI’s current scale, even fractions of a percentage represent potentially meaningful revenue for maintaining the payment infrastructure. Banks, payment-service providers and apps must invest in technology, cybersecurity, fraud monitoring, customer support, system capacity and resilience. The Reserve Bank of India has previously observed that payment-system pricing involves a delicate balance: excessive costs can discourage consumers and merchants from adopting digital payments, but excessively low charges may make the business uneconomic and discourage investment. 

This is particularly relevant as UPI expands into rural and semi-urban India and develops increasingly sophisticated features. The Government is still supporting digital-payment expansion directly. The Union Budget’s outcome framework for 2026-27 provides ₹2,000 crore for the incentive scheme promoting RuPay debit cards and low-value BHIM-UPI P2M transactions. It targets a 10% increase in UPI acceptance infrastructure and 18,187 crore merchant BHIM-UPI transactions during the year.  The emerging model is therefore not simply “government subsidy versus MDR.” It is increasingly a hybrid system in which public incentives support inclusion and low-value transactions while larger commercial transactions contribute to ecosystem economics.

A Digital-Inclusion Fund

The new framework contains another noteworthy provision: 5% of total MDR collections will be contributed to a dedicated fund for promoting UPI adoption among small merchants.The fund is intended to expand acceptance, encourage continued use and strengthen the participation of small businesses in India’s digital-payment system. This creates a redistributive feature within the payment architecture: part of the revenue generated by larger merchant transactions can help finance wider digital inclusion among smaller merchants.

Implications for Banks and Fintech Companies

For banks, payment-service providers and UPI applications, MDR can create a more sustainable source of payment-related revenue. The zero-MDR regime was highly effective in accelerating adoption, but it also meant that transaction growth did not automatically translate into proportional payment revenue. A limited MDR potentially changes those economics. The benefits could include greater investment in server capacity, payment reliability, fraud detection, cybersecurity, dispute resolution and customer support. A healthier revenue model may also encourage innovation in merchant services. However, policymakers will have to ensure that the resulting revenues actually strengthen the ecosystem rather than creating unnecessary costs or weakening competition.

Implications for Businesses

Large and medium-sized merchants are likely to experience the most direct impact because they will bear the MDR on qualifying transactions. For many businesses, 0.4% is relatively small compared with the cost of some other payment instruments, but it is not economically insignificant. Businesses operating on thin margins may reconsider the mix of payment methods they encourage. There is also a behavioural risk: some merchants could attempt to discourage UPI for larger transactions or informally pass the cost to customers. Effective enforcement of the rule against consumer surcharges will therefore be important.

At the same time, businesses benefit from digital payments through faster collection, reduced cash handling, easier accounting and transaction records. MDR should consequently be assessed against the broader economic benefits of digital payment acceptance rather than viewed purely as an additional expense.

Risks and Policy Challenges

The success of the new regime will depend on implementation.First, regulators must ensure that consumers do not end up paying disguised charges.Second, the distinction between small and larger merchants must remain administratively simple. Excessive complexity could create compliance burdens or incentives to restructure transactions artificially. Third, authorities will need to watch for transaction splitting—for example, breaking a payment exceeding ₹2,000 into multiple smaller transactions to avoid MDR. Fourth, the system must preserve competition. UPI became successful partly because of interoperability: consumers can pay across different banks and apps without being locked into one network. 

Finally, cybersecurity and fraud prevention remain essential. As transaction volumes increase, even a very small fraud rate can translate into substantial absolute losses.

The Larger Economic Significance

UPI’s transformation demonstrates how digital public infrastructure can reduce transaction costs across an economy. Its importance goes well beyond convenience. Digital payments can increase transaction transparency, support formalisation, generate financial histories for small businesses, improve tax compliance and facilitate access to formal financial services. They can also reduce some of the costs associated with handling and transporting cash.

RBI research has highlighted the broader role of digital payments in financial inclusion and noted UPI’s transformation of India’s retail-payment landscape. UPI accounted for 79.6% of retail-payment volume in 2023-24, illustrating how rapidly it displaced older payment mechanisms. The challenge in 2026 is therefore different from the challenge India faced when UPI was young. The original task was to achieve adoption. The next task is to combine scale, affordability, inclusion, security and financial sustainability.

Conclusion

The introduction of selective MDR marks an important transition in India’s digital-payments journey. The policy does not end free UPI for ordinary citizens. P2P transactions remain free; merchant payments up to ₹2,000 remain outside MDR; small merchants receive specific protection; and the Government estimates that around 96% of merchant transactions will remain unaffected. At the same time, selected higher-value merchant transactions will begin contributing towards the cost of maintaining and developing the infrastructure on which India’s digital economy increasingly depends.  The real test will be whether India can preserve the qualities that made UPI successful—simplicity, universality, low cost and interoperability—while creating a viable economic model for banks, fintech firms and payment-service providers.

If implemented with effective consumer safeguards and continued protection for small merchants, the new framework could represent the evolution of UPI from a heavily incentivised adoption model towards a more self-sustaining national payment infrastructure. If costs begin to migrate to consumers or discourage merchant acceptance, however, policymakers may need to recalibrate the system. With 24.51 billion transactions processed in August 2026 alone, UPI is no longer merely another payment option. It has become a piece of India’s core economic infrastructure.  The MDR debate, therefore, is fundamentally about the next stage of India’s digital economy: how to pay for the infrastructure of a nearly ubiquitous digital public utility without sacrificing the affordability and inclusion that made it successful in the first place.