Small merchants will not come under UPI MDR even above ₹2,000 if they meet this condition; check details

The Merchant Discount Rate (MDR) will be introduced on select UPI Person-to-Merchant (P2M) transactions from October 15, 2026, with a standard rate of 0.4% for transactions above ₹2,000.

However, small merchants operating under the Person-to-Person-Merchant (P2PM) framework will continue to enjoy zero MDR, according to the government’s frequently asked questions (FAQs) on the new framework.

The new MDR framework is aimed at creating a sustainable funding model for the UPI ecosystem, with revenue intended to support infrastructure, cybersecurity, innovation and customer service. The FAQ says the charge will apply only to transactions above ₹2,000, keeping smaller-value payments outside the MDR framework.

READ THIS: UPI MDR of 0.4% on transactions above ₹2,000 from October 15: What you need to know

Small merchants remain protected under P2PM

One of the key provisions in the FAQs is the continued zero-MDR protection for small merchants classified under P2PM.

The document defines P2PM as a specialised category for small vendors receiving UPI QR payments directly into their own bank accounts. Merchants receiving up to ₹1 lakh per month through UPI QR under this framework will continue to have zero MDR.

The framework is specifically designed to support micro-businesses and vendors in the unorganised retail sector, allowing them to accept digital payments without a deduction from their margins.

What if a small merchant receives a payment above ₹2,000?

A payment above ₹2,000 does not automatically mean that a small merchant will have to pay MDR.

According to the FAQ, MDR applicability depends on the overall categorisation of the merchant account. Therefore, a small merchant operating under an exempt P2PM tier will not become liable for MDR simply because an individual customer makes a payment above ₹2,000.

This distinction is important because the ₹2,000 threshold for standard P2M transactions should not be interpreted as an automatic fee trigger for every small vendor.

Kunal Jhunjhunwala, Founder, airpay, said: "For merchants, the immediate impact will be the 0.40% MDR on P2M transactions above ₹2,000. Larger businesses will likely absorb this with little friction, but for merchants operating on tight margins, even a small percentage can change how they think about accepting digital payments. The bigger challenge, though, is timing. Fintechs now have roughly a month to explain the new cost to merchants, help them get comfortable with it, and make the backend changes needed to support it. That's a short runway for a change with this much reach. Ultimately, the framework's success will come down to how well this transition is managed, not just how it's designed on paper. What the ecosystem needs is a model that works for merchants on the ground while giving fintechs and other payment providers enough room to keep investing in what makes UPI reliable, secure and easy to use. Once we get that transition right, MDR becomes a foundation for UPI's next stage of growth rather than a friction point."

How will banks identify eligible small merchants?

Acquiring banks and payment service providers will monitor merchants operating under P2PM based on their inward UPI transaction levels.

The FAQ says merchants whose inward UPI credits exceed ₹1 lakh per month consecutively for three months will be formally transitioned from P2PM to the P2M category.

This means the zero-MDR protection is linked not merely to being a small shop or local vendor, but to the merchant’s classification and transaction threshold.

DON'T MISS: UPI payments to remain free for P2P transactions; 0.4% MDR applicable only on merchant payments above ₹2,000: Govt

Do small merchants need GST registration?

No. The FAQ specifically states that GST registration is not required for a small merchant to qualify for zero-MDR protection under the P2PM tier.

Eligibility is determined by the monthly collection threshold of up to ₹1 lakh and the categorisation of the bank account. This provision is intended to avoid creating additional compliance barriers for informal micro-businesses moving towards digital payments.

Do merchants need new QR codes?

Small merchants do not need to replace or modify their existing UPI QR infrastructure.

The FAQ says existing QR codes, physical QR stands, and soundboxes will continue to function normally. Merchants will not have to re-register their QR codes or visit a bank branch merely because of the new MDR framework.

What happens to UPI payments below ₹2,000?

Transactions of up to ₹2,000 will remain outside the MDR framework. The FAQ says such small-value P2M transactions account for more than 95% of total UPI P2M transaction volume, meaning the vast majority of everyday UPI merchant payments will remain unaffected.

Consumers will also continue to use UPI without paying transaction charges. The FAQ states that there will be no consumer-facing UPI charge, including when customers scan QR codes at local shops and street vendors.

Why is MDR being introduced?

The FAQ says UPI handles billions of transactions every month and requires continuous investment in infrastructure resilience, cybersecurity, innovation and customer service.

The document cites the need for a sustainable funding model as UPI has scaled dramatically, processing 2,451 crore transactions worth ₹29.9 lakh crore in August 2026 alone.

At the same time, the FAQ emphasises that UPI MDR remains considerably lower than traditional card-based payment fees. It cites typical credit-card MDRs of 1.5%-2.5% and debit-card MDRs of up to 0.90%, compared with the proposed 0.4% UPI MDR for applicable transactions.

ALSO READ: MDR on UPI: What is Merchant Discount Rate? Why is the government bringing it now?

What does this mean for small shopkeepers?

For a small vendor covered by the P2PM framework, the key takeaway is simple: zero MDR continues as long as the merchant remains within the applicable P2PM classification and ₹1 lakh monthly inward-payment threshold.

An individual payment above ₹2,000 does not by itself trigger MDR for an exempt P2PM merchant. However, merchants whose UPI collections exceed ₹1 lakh per month for three consecutive months can be shifted to the standard P2M category, where the new MDR rules would apply.