Should India charge MDR on select UPI merchant transactions?
UPI became a mass payment system while remaining free for users and largely free for merchants. A revised framework now introduces MDR on a small share of merchant payments. Is that necessary to fund the next phase of UPI—or does it weaken the model that made UPI successful?
What has changed?
From 15 October 2026, the revised UPI framework introduces Merchant Discount Rate (MDR) on select person-to-merchant payments. P2P transfers remain free. Merchant payments up to ₹2,000 remain free, and small merchants receiving up to ₹1 lakh per month through eligible UPI QR payments remain under zero MDR. For other P2M payments above ₹2,000, the general rate is 0.4%, capped at ₹300 for transactions of ₹75,000 or more. Essential and thin-margin sectors such as railways, telecom, insurance, fuel and agricultural inputs face a flat ₹5 charge above ₹2,000, while specified capital-market payments face 0.02%, capped at ₹300. The government says about 96% of merchant transactions will remain unaffected and customers must not be charged MDR.
The real debate is not whether payment infrastructure costs money—it does. The disagreement is about who should fund it. Should banks, the government and the broader financial system continue absorbing or subsidising UPI costs because free payments create economy-wide benefits? Or should larger merchants begin paying a small transaction-linked fee so the payment ecosystem has its own sustainable revenue model?
Free for the user does not mean free to operate.
UPI requires banks, payment apps, payment aggregators and infrastructure providers to process enormous transaction volumes while investing in servers, cybersecurity, fraud prevention, customer support and new products. Supporters argue that a limited MDR on larger merchant transactions gives the ecosystem a direct revenue model while keeping consumers and most small merchants protected.
UPI is free to use, not free to run
Every UPI transaction touches infrastructure operated by banks, payment service providers and technology companies. These participants spend money on servers, networking, fraud systems, security, compliance, dispute handling and customer support. PhonePe CEO Sameer Nigam argues that the industry spends roughly ₹10,000–12,000 crore a year at current volumes and that government incentives have not fully covered those costs.
The framework protects everyday payments
The revised model is not a blanket fee on UPI. Person-to-person transfers remain free, payments to merchants up to ₹2,000 remain free, and qualifying small merchants remain protected. The government estimates that roughly 96% of merchant transactions will not attract MDR. Consumers are not supposed to pay the MDR directly.
A payment business needs a payment revenue model
Nigam argues that six years of zero MDR distorted the market because payment companies had to find other ways to monetise users instead of earning from their core service. In his view, transaction-linked revenue can encourage banks, apps and aggregators to compete on payments, invest in new products and expand UPI to people and merchants who are still outside the ecosystem.
0.4% is still cheaper than many alternatives
Supporters point out that merchants already accept payment methods with processing charges. Nigam argues that the new UPI MDR remains below many card and wallet payment charges. The framework also uses lower or flat rates for selected thin-margin sectors rather than applying the full general rate everywhere.
Do not put friction into the one digital payment system that already works at massive scale.
Critics argue that zero MDR helped turn UPI into a near-universal payment habit. Even when a fee is formally charged to merchants, it becomes a cost of doing business and can affect prices, payment choices or merchant behaviour. They question why UPI users and merchants should fund the system through transaction fees when banks, NPCI and the wider financial system already gain substantially from digital payments.
The merchant may pay, but the cost does not disappear
Ashneer Grover argues that calling MDR a merchant charge does not mean consumers are economically unaffected. A merchant facing an additional payment cost can absorb it, adjust prices, discourage certain payment methods or change discounts. Grover therefore describes the levy as effectively another charge on economic activity even if it is not legally collected as a government tax.
Why charge merchants when the system already creates value?
Grover points to profits or surpluses elsewhere in the financial system, including banks and NPCI, and argues that UPI should continue to be supported without introducing MDR. His broader point is that UPI reduces cash-related costs and strengthens the formal financial system, so its funding should be considered infrastructure spending rather than something that must earn a fee on each merchant transaction.
Zero MDR helped create the UPI habit
UPI's appeal is partly its simplicity: a merchant can display a QR code and receive a payment without thinking about card-style acceptance fees. Critics worry that once MDR is reintroduced, the political and commercial barrier to expanding charges later becomes lower. Today's limited framework could therefore matter beyond the transactions immediately affected.
The ₹2,000 threshold creates odd incentives
The cost of processing a digital payment does not necessarily jump sharply when a transaction moves from ₹2,000 to ₹2,001. Grover has questioned why a merchant payment should attract a fee based on its classification and amount when a large person-to-person transfer can remain free. Threshold-based rules can also encourage merchants or customers to think about splitting transactions or preferring alternative payment methods.
So what is the real disagreement?
Both sides agree that UPI has become critical infrastructure and that operating it has real costs. They disagree on how those costs should be recovered.
The supporting side says payment providers need a direct, predictable revenue stream. Charging a small subset of larger merchant transactions is more sustainable than depending indefinitely on taxpayer-funded incentives while keeping consumers and small merchants free.
The opposing side says uPI produces economy-wide benefits for banks, government, merchants and consumers. Keeping the payment rail free can itself be a valuable public-policy investment, and introducing transaction charges risks weakening the behaviour that made UPI successful.
The real question is: should UPI be treated primarily as public digital infrastructure whose costs are subsidised, or as a payment network that should increasingly fund itself through merchant fees?
Where should the line be drawn?
Instead of asking only 'free UPI or paid UPI?', test the policy across different transactions.
The revised framework is already trying to draw a boundary between public-good payments that should remain free and commercial payments that can help finance the network. The debate is whether it has drawn that boundary in the right place.
Where do you stand?
How should UPI's operating costs be funded?
Sources
Arguments cite these pieces. Open them when you want the underlying reporting or law.
Ashneer Grover questions new UPI MDR charges
Grover questions why merchant UPI transactions should attract MDR while P2P transfers remain free and argues that the underlying processing cost does not change simply because the recipient is a merchant.
Read source →MDR on UPI will kill mobile payments, Ashneer Grover says
Grover argues that introducing MDR risks damaging the frictionless mobile-payment model that helped UPI scale.
Read source →No Charges for UPI Users
Government explanation of the policy rationale behind moving toward a sustainable, threshold-based MDR framework while keeping UPI free for citizens.
Read source →Sameer Nigam on MDR monetisation model
Nigam argues that MDR can give banks, apps and payment aggregators a transaction-linked monetisation model and encourage investment and competition in UPI.
Read source →UPI Continues to Remain Free for Peer to Peer Transactions and 96% of Merchant Transactions
Official explanation of the revised UPI MDR framework, including exemptions, the 0.4% general rate, caps, special-sector rates and consumer safeguards.
Read source →UPI MDR debate: Ashneer Grover and Sameer Nigam on the new charge
Reports Grover's criticism of the merchant charge and Nigam's argument that payment infrastructure needs sustainable revenue.
Read source →UPI industry bleeding money, cannot depend on govt subsidies: PhonePe CEO Sameer Nigam
Nigam argues that banks and payment companies incur substantial annual costs at current volumes, need a sustainable commercial revenue model and should not remain dependent on government subsidies.
Read source →