The proposed merchant discount rate (MDR) on select Unified Payments Interface (UPI) transactions has been postponed until after Diwali, giving retailers and payment service providers additional time to prepare for the pricing change. The National Payments Corporation of India (NPCI) said the revised implementation date would be announced separately.
The fee was originally scheduled to take effect on October 15. However, the UPI and Services Steering Committee decided to defer its implementation, taking into account the ongoing festive season and the importance of uninterrupted digital payments during a period of increased consumer spending.
The decision offers temporary relief to merchants preparing for the festive rush, when purchases across retail, electronics, consumer goods and other categories typically increase. It also gives payment companies and banks more time to prepare their systems for the proposed changes.
Under the new framework, a 0.4% MDR will apply to eligible UPI payments made from bank accounts to merchants for transactions exceeding ₹2,000. The fee will be capped at ₹300 per transaction. Payments of ₹2,000 or less and person-to-person (P2P) transfers will remain exempt from the proposed charge. Qualifying small merchants will also be exempt under the framework.
What is MDR and who will pay?
The Merchant Discount Rate is a fee associated with processing digital payments accepted by businesses. It is generally paid by merchants to banks, payment service providers or other intermediaries involved in processing transactions.
The proposed change marks a shift from the zero-MDR framework for bank account-based UPI payments that has been in place since January 2020. Under the existing arrangement, merchants have not paid MDR on these transactions, helping UPI become a widely used payment option for everyday purchases.
The proposed fee is intended to help support the growing costs of maintaining India’s digital payment infrastructure. As transaction volumes increase, banks and payment companies face expenses related to technology, payment processing, cybersecurity, fraud prevention and merchant services.
NPCI has indicated that revenue from the proposed MDR framework would help support merchant expansion, payment infrastructure and fraud prevention.
Most UPI merchant transactions to remain free
The proposed fee is expected to have a limited impact on the number of transactions affected. Industry estimates indicate that more than 95% of UPI merchant transactions by volume will continue to remain free because the levy applies only to eligible payments above the ₹2,000 threshold.
However, the impact could be more significant when measured by transaction value, as higher-value payments account for a substantial share of the total amount processed through UPI.
The distinction is important for consumers and retailers. A customer making a small payment at a neighbourhood shop would not be affected by the proposed MDR, while an eligible bank account-funded merchant payment exceeding ₹2,000 would fall within the framework.
Person-to-person transfers between individuals will also remain outside the levy. The framework does not permit merchants to pass the MDR directly on to customers, meaning the proposed fee is intended to be borne by the merchant rather than added to the customer’s bill.
Merchant groups had sought postponement
The decision follows concerns raised by merchant associations about introducing additional payment costs during the festive season. The All India Mobile Retailers Association and the All India Consumer Products Distributors Federation had sought a postponement, along with changes to the proposed exemptions and the treatment of certain transactions.
The groups had also raised concerns about the possible effect of MDR on retail margins at a time when businesses are preparing for higher sales volumes. Their representations came amid broader discussions about balancing the costs of digital payment infrastructure with the need to keep electronic payments accessible and affordable.
The delay provides temporary relief, although it does not mean the proposed MDR framework has been withdrawn. The revised implementation date remains subject to a separate announcement by NPCI.
Funding digital payments remains a key challenge
The proposed MDR comes amid discussions about how India’s digital payments ecosystem can finance its expanding infrastructure without undermining the affordability that has encouraged widespread UPI adoption.
The government has supported the ecosystem through incentive payments for eligible low-value UPI transactions and RuPay debit card payments. However, the budget allocated for UPI and RuPay incentives in the financial year 2026-27 is around ₹2,000 crore, significantly below the estimated cost of operating the payment infrastructure. No subsidy has been paid since April 2025, according to reports.
For merchants, the immediate priority will be to understand the final implementation date and ensure payment systems are ready for the new rules. Banks and payment service providers will also need to communicate the applicable rates and exemptions clearly.
For consumers, ordinary UPI payments will continue without the proposed MDR during the festive period. The next major development will be NPCI’s announcement of the revised rollout date, which will determine when eligible merchant transactions begin attracting the fee.