UPI Charges Explained: Who Pays the New 0.4% Charge on Payments Above ₹2,000, and Who’s Exempt
The government has ended nearly six years of fully free UPI payments by notifying a Merchant Discount Rate (MDR)/UPI Charges on select person-to-merchant (P2M) transactions above ₹2,000. The new framework, cleared under the Payment and Settlement Systems Act, 2007 and detailed in a fresh set of FAQs from the Finance Ministry and NPCI, kicks in from October 15, 2026. Here’s a complete, easy-to-follow breakdown of who pays, who doesn’t, and exactly how much.
What’s Changing in UPI charges From October 15
From October 15, 2026, a 0.4% MDR will apply to person-to-merchant UPI transactions above ₹2,000, capped at ₹300 for payments of ₹75,000 and above. For context, a 0.4% fee on a ₹2,000 transaction works out to roughly ₹8.
Crucially, this is a merchant-side charge, not a customer charge. As the Finance Ministry put it, “MDR is a charge within the merchant payment ecosystem. It is not a charge on customers making UPI payments.” Individuals will continue to enjoy unlimited free UPI usage with no monthly quotas, volume restrictions, or tiered caps.
Who Is Completely Exempt From the New MDR
The exemptions are broad, and the government says they cover the overwhelming majority of UPI usage in India.
- All person-to-person (P2P) transfers: Sending money to friends and family remains 100% free, no matter the amount, and regardless of monthly volume.
- P2M transactions up to ₹2,000: Everyday purchases at local shops, street vendors, and small stores stay entirely free for both the customer and the merchant. This threshold alone protects more than 95% of all P2M transaction volume.
- Small merchants under the P2PM framework: Street vendors, kirana stores, and other small sellers who receive up to ₹1 lakh a month through UPI QR codes remain exempt from MDR on all transactions — even if an individual transaction exceeds ₹2,000. There’s no requirement to register for GST or upgrade existing QR infrastructure to qualify. Acquiring banks will monitor inflows through a velocity check; only if a merchant crosses ₹1 lakh a month for three consecutive months do they move into the standard P2M category.
Taken together, the government estimates that only about 4% of merchant transactions will actually be touched by the new MDR — the rest fall below the ₹2,000 threshold or qualify for the zero-MDR P2PM exemption.
The MDR Rate Structure: How Much Will Merchants Pay
The new framework isn’t a flat 0.4% across the board. It’s tiered by sector:
| Category | MDR Rate | Notes |
|---|---|---|
| Standard P2M transactions above ₹2,000 | 0.4% | Capped at ₹300 for payments of ₹75,000 and above |
| Essential/thin-margin sectors (railways, telecom, insurance, fuel, agricultural inputs) | Flat ₹5 per transaction | Applies only above ₹2,000; keeps costs predictable for critical services |
| Government utility bills (electricity, water, piped gas) | Flat ₹5 per transaction | Exempt below ₹2,000 |
| Education fees (school and university tuition) | Flat ₹5 per transaction | Exempt below ₹2,000 |
| Capital markets (mutual funds, securities, stockbroking) | 0.02% | Capped at ₹300 per transaction |
| Small merchants under P2PM (up to ₹1 lakh/month via QR) | Zero MDR | No GST registration or QR upgrade needed |
| P2P transfers and all payments up to ₹2,000 | Zero | No charge at all |
The essential-sector carve-out matters more than its share of transaction count suggests: railways, telecom, insurance, fuel, and agricultural inputs together make up only around 17% of P2M transaction volume but nearly 46% of P2M transaction value, which is why the government opted for a flat, predictable ₹5 fee instead of a percentage-based charge in these categories.
Who Actually Bears the Cost — Merchant or Customer?
This is the question most people are searching for, and the government has been explicit: MDR is levied on the merchant, not the customer. Banks have been advised to ensure merchants do not pass this cost on to customers at the point of sale, and UPI app providers are barred from levying any platform fees or hidden charges of their own. So while a large retailer accepting a ₹5,000 UPI payment will see roughly ₹20 deducted from settlement, the customer’s bank balance is debited exactly ₹5,000 — no extra charge shows up on their end.
Is There GST on the New UPI MDR?
Yes — and this is a common point of confusion. GST applies to charges like MDR when they are levied on payment instruments. Since MDR on P2M UPI transactions had been at zero since January 2020, there was previously no MDR-linked GST either. With MDR now reinstated for transactions above ₹2,000 in the specified categories, the applicable GST framework on that MDR component would follow standard rules for financial services — merchants and payment aggregators should track this for compliance, though the government has separately and repeatedly clarified there is no GST on the underlying UPI transaction value itself, only on the service charge (MDR), where applicable.
Why the Government Reintroduced MDR
UPI has scaled from a niche payment rail to the backbone of India’s digital economy — growing from ₹21.3 lakh crore in transaction value in FY 2019-20 to over ₹260 lakh crore by March 2025, and processing well over 2,300 crore transactions a month by mid-2026. Sustaining that scale, officials say, requires continuous investment in cybersecurity, fraud prevention, and infrastructure upgrades — costs that have so far been absorbed through a government incentive scheme (₹3,631 crore paid out in 2023-24 alone) rather than recovered from merchants. Industry bodies representing banks and payment companies had also flagged financial sustainability concerns with the zero-MDR regime, arguing incentive payouts covered only a fraction of the ecosystem’s actual costs.
Quick Reference: Key Conditions to Remember
- Effective date: October 15, 2026.
- Threshold: MDR applies only to P2M transactions above ₹2,000; everything below stays free.
- P2P is untouched: No charge, ever, regardless of amount or frequency.
- Small merchant shield: Up to ₹1 lakh/month via QR code = zero MDR, tracked via a rolling velocity check.
- Cap: MDR is capped at ₹300 per transaction for payments of ₹75,000 and above.
- No customer pass-through: Banks must ensure merchants don’t charge customers extra, and UPI apps cannot add platform fees.
Gourav (2026). UPI charges from 15th October 2026: 0.4% Charge on Select UPI Payments Above ₹2,000 From October 15. Palgou India.
