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UPI merchant fee put off till after Diwali: what MDR is and who pays it

· 5 min read · Tryvest

NPCI has deferred the 0.4% MDR on UPI shop payments above ₹2,000. What MDR is, who pays, what stays free, and what to watch next.

A fee on some UPI payments to shops, called the merchant discount rate or MDR, was due to start on 15 October 2026. On 13 October, the National Payments Corporation of India (NPCI), which runs UPI, put it off until after Diwali, with the new date "to be notified separately". Here is what the fee is, who pays it and what stays free.

What happened

In mid-September 2026, NPCI published FAQs for a new MDR on select person-to-merchant (P2M) UPI payments, starting 15 October. Two days before that date, NPCI's UPI and Services Steering Committee deferred the start because of the festive season, giving shopkeepers what reports called a breather. Business Standard reported that the fee structure is unchanged; only the date has moved.

The fee has also reached the Supreme Court. On 28 September 2026, a bench led by Chief Justice Surya Kant heard a plea against the decision. It refused to stop the fee but issued notices to the Centre, the RBI and NPCI, asking them to explain its legal basis on affidavit. The government's lawyer argued that MDR is not a tax or a fee for the government, but a settlement charge between banks and payment firms.

What the fee looks like

Based on NPCI's FAQs of 15 September, as reported by Entrackr and SCC Online, the framework has these parts:

  • Merchants pay, customers do not. The fee applies to the shop or business receiving the money. Merchants are not allowed to pass it on, and UPI apps cannot add a platform fee.
  • Payments up to ₹2,000 stay free. The 0.4% fee applies only to select merchant payments above ₹2,000. NPCI says payments of ₹2,000 or less make up more than 95% of merchant UPI volume.
  • A cap of ₹300. A ₹3,000 payment carries ₹12, a ₹50,000 payment carries ₹200, and anything of ₹75,000 or more stops at ₹300.
  • A flat ₹5 for some sectors. Railways, telecom, insurance and fuel pay ₹5 per payment above ₹2,000 instead of 0.4%.
  • A much lower rate for investing. Payments to mutual funds, brokers and other capital-market firms carry 0.02%, also capped at ₹300.
  • Small shops and friends are exempt. Sending money to family or friends (person-to-person) stays free at any amount. Small merchants receiving up to ₹1 lakh a month through UPI QR codes pay nothing.

NPCI says the money will stay inside the UPI system, paying for infrastructure, fraud prevention, cybersecurity and customer service.

The idea behind it: what is MDR?

Every digital payment has a cost. When you pay a shop, several parties do work in the background: your bank, the shop's bank, the app you use and the network that connects them (for UPI, that is NPCI). MDR is the small slice of each payment that the merchant pays to cover this work.

Card payments have always worked this way. According to Entrackr, credit card MDR usually runs between 1.5% and 2.5%, and debit card MDR is capped at up to 0.9%. That is why some small shops prefer cash or UPI over cards. UPI merchant payments carried no MDR for nearly six years, so the question of who pays for running the system has been open for a long time.

The lesson for a beginner: a service that is free at the counter still costs something, and someone pays for it. Note also that investment payments get a far lower rate than shopping.

What this does not change

If you only use UPI as a customer, the FAQs say nothing changes for you. Scanning a QR code at a shop stays free, whatever the amount.

One practical point: since merchants are not allowed to add the fee to your bill, an extra "UPI charge" at a shop would go against the stated rules. If anyone asks you to pay such a charge or to share a UPI PIN to "receive" money, treat it with care; a PIN is only ever needed to send money.

What to keep an eye on

  • The new start date. NPCI has said the fee will start soon after Diwali, on a date it will announce separately. Some reports point to November, but NPCI's own note does not give a date.
  • The Supreme Court case. The Centre, the RBI and NPCI have been asked to file their replies on the legal basis of the fee.
  • A fund for small merchants. NPCI has proposed one, for smaller towns and regions, with details to be settled with the RBI within three months of the September FAQs.
  • Monthly UPI data. NPCI publishes UPI volumes every month, which will show how merchant payments behave once the fee starts.

Key points

  • MDR is a fee merchants pay to the banks and payment firms that process a digital payment; customers are not meant to pay it.
  • NPCI's UPI fee is 0.4% on select merchant payments above ₹2,000, capped at ₹300, with ₹5 flat for some sectors and 0.02% for investment payments.
  • Person-to-person transfers, merchant payments up to ₹2,000 and small merchants receiving up to ₹1 lakh a month stay free.
  • The 15 October start was deferred to after Diwali; the new date is yet to be notified, and the Supreme Court has sought replies from the Centre, the RBI and NPCI.

Want to see how small costs add up over time? Our lesson on expense ratios and exit loads explains another fee that is easy to miss.

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