A wider debate has centred around the ending of UPI’s free era. The government has introduced a 0.4% MDR on person-to-merchant UPI transactions above Rs 2,000. The transactions between two individuals attracts no charge. Smaller merchants are also spared.

Concerns are, however, raised by traders that the new MDR framework would lead to price rise and impact business growth. Opposition parties are saying that it would benefit credit card companies.

There is also a view that an evaluation needs to be made between private benefit and private cost versus social benefit and social cost. The UPI, after all, was built as a sovereign-backed digital public infrastructure, having the characteristics of a public good. 

The government is clear that MDR will not affect more than 95% of the daily UPI transactions. A fee was needed to make the UPI ecosystem commercially sustainable. The UPI system requires continuous investments into infrastructure, server capacity, cybersecurity, fraud prevention and technical support.

Who gains and who loses? Here is all that you need to know.  

Will you face charges once the UPI transaction is above Rs 2,000?

Not if it is a person-to-person (P2P) transaction. That is completely free for the users, regardless of the amount transferred. 

So, what is a P2P transaction in UPI? It is a direct, real-time money transfer between two individual bank accounts. The participants involve two individuals, rather than a business or store.

Payments made to merchants above Rs 2,000 will bear a fee. The new MDR (Merchant Discount Rate) framework will apply to person-to-merchant (P2M) transactions above Rs 2,000. There is no charge for transactions up to Rs 2,000.

How is P2P different from a P2M transaction? In case of a P2M transaction, the receiver is a business, shopkeeper, utility provider or e-commerce website like Amazon.

What has changed now?

The zero-MDR framework will end from 15 October. Under the revised framework, a 0.4% MDR will apply to specified P2M transactions above Rs 2,000. But the MDR for amounts above Rs 75,000 will be capped at a maximum of Rs 300 per transaction. If the transaction say is Rs 100,000, the fee will be Rs 300, and not Rs 400 (if you apply the 0.4% rate).

The layered structure works out like this:

Rs 3,000 – charge of Rs 12;

Rs 10,000 – charge of Rs 40;

Rs 50,000 – charge of Rs 200;

Rs 75,000 and above – charge of Rs 300 (cap).

What has remained the same?

The Ministry of Finance has clarified that consumers will continue to use UPI 100% free of charge. Banks have been ordered to ensure merchants do not pass this cost onto you. MDR is not a consumer tax or a direct surcharge on your wallet.

Micro-merchants and small businesses are also protected and will continue to pay zero MDR. Small street vendors or neighbourhood shops that receive up to Rs 1 lakh per month through UPI QR directly into their accounts are entirely exempt from paying any MDR.

Is there an indirect cost in terms of price rise?

If merchants decide to absorb the cost that they will have to bear on transactions, then there is no impact on consumers. But some merchants, particularly the smaller ones who operate on very thin margins, may factor the cost into pricing, which will then have an indirect impact on consumers.  Retailers and apparel makers have already warned of price hikes. Smaller retailers may opt to drive transactions to cash.

The government’s notification, however, prevents retailers from directly passing on the MDR charges to consumers. There can’t be an UPI surcharge.

Are there limits on free UPI transactions?

There are no monthly quotas, volume limits, or tiered caps on free UPI transactions for individuals.

Existing daily transaction limits of Rs 1-5 lakh remain. They are purely risk-management tools and not commercial charge tiers.

The limit for payment towards educational institutions and hospitals is Rs 5 lakh per transaction.  

What is MDR and how does it work?

It is a processing fee that businesses and shopkeepers pay to banks, payment gateways and payment networks to accept digital payments from their customers.

The cost is borne entirely by the merchant, not the buyer. The collected fee is split among the entities that make the digital transaction ecosystem work.

Some concepts in the ecosystem are useful to note. The customer’s bank is the issuing bank, while the merchant’s bank is the acquiring bank. The payment network which manages UPI is the National Payments Corporation of India (NPCI). Payment gateways are players like Razorpay, Cashfree, PayU, Paytm and Juspay. Digital payment platforms have entities like PhonePe, Google Pay and Amazon Pay. 

What happens to utility, insurance and fuel payments?

In specific sectors like utilities, railways, telecom services, insurance and fuel, payments above Rs 2,000 will follow a flat-rate structure of Rs 5 per transaction. It will not have the standard 0.4% MDR.

So, you can pay your insurance premiums, fuel purchases at petrol pumps and electricity and water bills above Rs 2,000 through UPI on a flat fee of Rs 5 per transaction.

What about mutual funds and stock market payments?

Payments towards mutual funds, securities, stockbrokers and dealers through UPI will attract a lower MDR of 0.02% of the transaction value, capped at Rs 300 per transaction.

Mutual fund SIPs set up through UPI AutoPay will not be impacted as recurring mandates are exempt from the charge.

What about automated recurring payments?

UPI Mandates and AutoPay transactions carry no MDR at all. This includes automated recurring payments such as utility bills, OTT subscriptions and recurring investments.

Can UPI apps charge users a platform fee?

UPI apps can’t charge a platform fee on consumers. Nor will consumers have to pay any other charge for payments made through UPI. There is no separate transaction fee.

Does MDR apply to UPI payments made through credit cards?

Credit-linked transactions such as RuPay Credit Cards on UPI or pre-sanctioned bank credit lines follow separate credit-product rules.

The MDR framework applies only to direct account-to-account UPI payments made to merchants. 

Is the government taxing UPI payments above Rs 2,000?

MDR is a payment ecosystem charge and is not collected as a tax by the government or NPCI.

The charge amount is distributed among ecosystem participants to support the operation and expansion of UPI.

Will most UPI merchant transactions be affected?

MDR will not impact most UPI transactions. As per NPCI data, more than 95% of daily UPI transactions fall below the Rs 2,000 threshold and will remain completely unaffected by the new framework.

Who all are opposing the new framework?

Opposition parties, traders and sections of the digital payment ecosystem want the government to roll back the revised MDR framework as it may lead to higher prices and harm business growth. 

The political parties have accused the government of yielding to US pressure and said it would benefit dominant US card companies (like Visa and Mastercard), which were losing out to India’s zero-MDR ecosystem.

The government has firmly ruled out any possibility of a rollback, stating that the decision has been taken with the “clear goal of building a self-sustaining, inclusive and affordable digital payments ecosystem”. 

Why is UPI moving away from a free ride?

UPI is moving away from a completely free model so that it becomes a commercially sustainable model for the ecosystem. Banks, payment service providers and fintech companies had no direct revenue stream for six years while absorbing the technical investments they made. 

The UPI system has been processing billions of transactions. In FY26, over 24,162 crore transactions were generated worth Rs 314.2 lakh crore in FY26. For the month of August, it processed 2,451 crore transactions worth Rs 29.9 lakh crore.

Evolving into the world’s largest real-time payment system, the UPI model needs continuous investments into infrastructure, server capacity, cybersecurity, fraud prevention and technical support. Part of the fee will also go into a special fund to build digital payment networks in rural areas and smaller towns.

What could be the revenue pool getting unlocked?

There are various estimates by analysts, pegging it between Rs 15,000 crore and Rs 22,000 crore. 

Government projects the collection around Rs 15,000 crore, while Goldman Sachs estimates the new framework to unlock an industry revenue pool of around Rs 20,600 crore.

Bernstein puts the annual revenue pool at Rs 22,000 crore by FY28 if a 40-basis-point MDR is imposed on half of the transaction value. In this monetisation opportunity, banks, as per the brokerage’s estimates, could collectively get Rs 14,000 crore, while third-party payment application providers, or TPAPs, could earn about Rs 7,000 crore.

Social cost evaluation

Krishnamurthy Subramanian, Professor at the Indian School of Business and former chief economic advisor to the Government of India, believes that the UPI can’t be evaluated using private cost versus private benefit but by social cost and social benefit, because a large part of its benefit accrues to people other than the person making the transaction.

India built UPI as sovereign-backed digital public infrastructure, and it has the characteristics of a public good.

“Why should we impose a charge on a public infrastructure that generates benefits far beyond the individual transaction?” he posts on X.