UPI payments to remain free for P2P transactions; 0.4% MDR applicable only on merchant payments above ₹2,000: Govt

Unified Payments Interface (UPI) transactions between individuals will remain completely free irrespective of the transaction value, while a nominal Merchant Discount Rate (MDR) of 0.4% will apply to select high-value payments made to merchants, the government said on Tuesday.

P2P UPI transactions to remain completely free

The Centre has amended the Payment and Settlement Systems (PSS) Act, 2007, providing the legal framework to notify electronic payment modes on which charges can be waived. On September 14, the government notified that UPI transactions up to ₹2,000 will attract zero MDR.

The National Payments Corporation of India (NPCI) subsequently issued a detailed circular on September 15 following deliberations by its UPI steering committee on operational parameters, fee distribution and category-wise caps.

Under the new framework, person-to-person (P2P) UPI transactions will not attract any charges, regardless of their value. P2P payments account for 37% of UPI transactions by volume and around 70% by value.

0.4% MDR on merchant transactions above ₹2,000

MDR will apply only to person-to-merchant (P2M) transactions exceeding ₹2,000. The standard MDR has been set at 0.4%, with the amount shared among participants in the payments ecosystem, including banks and app providers.

For high-value P2M transactions of ₹75,000 and above, MDR will be capped at ₹300 per transaction. This means the percentage-based charge will not continue rising beyond the prescribed cap.

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₹5 flat MDR for essential sectors

The framework provides special rates for certain sectors. Transactions above ₹2,000 involving railways, telecom, insurance, fuel and agriculture inputs, among others, will attract a flat MDR of ₹5 per transaction.

These categories account for nearly 17% of P2M UPI transactions by volume and about 46% by value. The flat-rate structure is intended to provide greater cost predictability for critical services and thin-margin businesses.

Capital market payments get lower MDR

A much lower MDR of 0.02%, capped at ₹300, will apply to payments involving mutual funds, securities, stock brokers and dealers.

The government said the reduced rate is aimed at encouraging wider retail participation in formal financial markets while keeping transaction costs low.

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Small vendors to continue with zero MDR

Small merchants will continue to receive protection under the Person-to-Person-Merchant (P2PM) framework.

Merchants receiving up to ₹1 lakh a month through UPI QR codes under this classification will continue to enjoy mandatory zero MDR on all transactions. The framework is aimed at supporting small and informal businesses as they move towards formal digital payments.

No platform fees or hidden charges for consumers

For consumers, UPI app providers will be prohibited from levying platform fees or hidden charges. Banks have also been advised to ensure that merchants do not pass MDR costs on to customers making UPI payments.

There will be no monthly transaction quotas, volume limits or tiered caps for free UPI usage. Daily transaction limits of ₹1 lakh to ₹5 lakh, depending on the category, will continue to serve as risk-management measures rather than commercial charge thresholds.

Only 4% of merchant transactions expected to be affected

The government estimates that only 4% of merchant transactions will be affected by the introduction of MDR, as most transactions either fall below ₹2,000 or qualify for zero MDR under the P2PM framework.

To support smaller merchants, 5% of total MDR collections will be contributed to a dedicated fund aimed at expanding UPI adoption and acceptance among small businesses, particularly in rural and semi-urban areas.

The government said the framework is intended to make the UPI ecosystem financially sustainable while keeping the vast majority of digital payments free. It also aligns with the Standing Committee on Finance's 32nd report, which had called for a viable revenue mechanism to ensure the long-term sustainability of UPI.

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