The UPI merchant fee (MDR) debate: meaning, how it works in India

MDR stands for merchant discount rate. It is the small percentage a shop or app keeps out of every digital payment to pay the bank, the card network and the payment company that carried the money. If a customer pays ₹1,000 and the MDR is 1%, the merchant receives ₹990.

For UPI, the Unified Payments Interface run by the National Payments Corporation of India (NPCI), this fee has been zero for years. That makes UPI free for the shopkeeper and the customer, which helped it grow into the most used way to pay in India. It also means the companies that move the money earn nothing from the payment itself, and that tension is the heart of the debate.

The Payment and Settlement Systems Act 2007 governs payment systems in India. A change made through the Finance Act 2019, in section 10A of that Act, barred banks and payment providers from charging MDR on certain electronic modes, and UPI was one of them. It came into effect in January 2020. Before that, MDR on UPI had been capped at a very low level, reported as up to 0.3% in some coverage.

The aim was to push digital payments by taking cost away from small merchants. The tax side was handled in the Income-tax Act, where a section requires certain large businesses to offer UPI and some other digital modes without charging customers or merchants extra for them. The policy was a deliberate choice to treat UPI as shared public infrastructure.

Someone still has to pay for servers, fraud checks, customer support and the banks' own systems. Under zero MDR the government steps in through an incentive scheme. It pays a small amount to the banks and payment apps for processing certain merchant payments, on a sliding basis.

According to press coverage of the 2026 Union Budget, ₹2,000 crore was set aside for UPI incentives in the financial year 2026-27, against ₹2,196 crore in 2025-26. Industry bodies such as the Payments Council of India have said that the real cost of running the system is much higher, with one estimate quoted in news reports at nearly ₹10,000 crore a year. Treat that number as an industry estimate, not an official one.

• Customers pay nothing to send money in most cases.
• Merchants pay no MDR on UPI payments.
• Banks and payment apps receive a government incentive for processing, which has been reduced over the years.
• Large apps make money from other services: loans, insurance, wallets, ads and merchant tools.

As of November 2026, Parliament has passed the Taxation and Other Laws (Amendment) Bill 2026. According to news reports and legal summaries, the bill amends section 10A of the Payment and Settlement Systems Act so that the Central Government decides by notification which electronic modes must stay free of charges. The earlier text was a flat bar. The new text turns it into a power the government can use or relax.

The Finance Minister has said in Parliament that the change is only an enabling provision and that no MDR framework has been finalised. The rate, the merchant threshold and the date are therefore not settled. Reports have mentioned ideas such as a fee only on payments above ₹2,000 to large merchants, and rates from 0.25% to 0.4%. Those are proposals reported by the press, not rules. Confirm anything you rely on in the Gazette and in NPCI or Reserve Bank of India (RBI) circulars.

The political line so far is that consumers will not be charged and that small merchants will be protected. Press coverage describes the idea as a fee on large merchants only, for example big e-commerce platforms, defined by an annual turnover limit that has not been published. Person-to-person transfers are expected to stay free.

The risk for smaller businesses is that a large merchant may pass the cost on, for example as a convenience charge at checkout. Policy commentators have argued that a tiered fee will protect consumers only if such surcharges are blocked. A survey reported in the press suggested some users would shift away from UPI for larger payments if costs rose, which is why the threshold matters.

Payment startups such as UPI apps and payment aggregators earn little today on the payment itself. A new MDR would create a revenue pool to be shared between the customer's bank, the merchant's bank, the app and the payment aggregator. Who gets what is decided by regulation and by bargaining, not by the market alone.

For a startup, the effect depends on the role. A payment aggregator that serves large merchants could gain a new line of income. A UPI app that only handles person-to-person transfers may see no change. A startup that sells to small shops may be unaffected, but may face a more complex pricing story with merchants who hear about charges in the news. The take rate, meaning the share of each payment a company keeps, is the number to watch.

Reports about UPI charges often mix three different things, and a reader can tell them apart by asking who pays, on what and from when.

Check the source of the claim too. A report quoting unnamed officials is not a notification. A statement that MDR is possible is not a statement that it is charged.

• Law versus rule: the bill enables charges, a later notification would set them.
• Merchant versus customer: the stated plan is a fee on merchants, not users.
• Threshold: the turnover or payment size above which a fee applies.
• Rate: the percentage and any cap per transaction.
• Date: no confirmed start date as of November 2026.

The incentive is money from the government to the banks and apps. MDR is money from the merchant to the banks and apps. A convenience fee is an extra amount added to the customer's bill by the merchant or platform. People often call all three a UPI charge, but they sit in different places in the chain.

This guide is general information and not legal, tax or investment advice. Rules on payments change, so check the current circulars or speak with a professional before making decisions.