NPCI Sets 0.4% Merchant Charge on Transactions Above ₹2,000 From 15 October
The National Payments Corporation of India will levy a merchant discount rate on larger UPI payments for the first time since the system went fee-free in 2020, aiming to make the world’s largest real-time payments network financially self-sustaining without passing any cost on to the roughly 500 million Indians who use it to pay.
The Unified Payments Interface has been free for both consumers and merchants to use since 2020, a policy choice that did more than perhaps any other single decision to make UPI the backbone of India’s cash-to-digital transition. That era ends on 15 October 2026. The National Payments Corporation of India (NPCI), which operates UPI, announced this week that a Merchant Discount Rate (MDR) of 0.4 per cent will apply to person-to-merchant UPI transactions above ₹2,000, formalising a shift that the government had already begun laying the legal groundwork for in August, when it amended India’s payments law to permit merchant fees on some UPI transactions.
The scale of what is being repriced is enormous. NPCI’s own figures show UPI processed 24.51 billion transactions worth roughly ₹29.9 trillion (about $312 billion) in August 2026 alone. According to NPCI, more than 95 per cent of UPI merchant transactions by number involve payments of ₹2,000 or less, which will remain entirely fee-free — meaning the new charge is explicitly targeted at higher-value commerce rather than the small, everyday transactions (a tea stall, an auto-rickshaw fare, a kirana store purchase) that make up the bulk of UPI’s transaction volume and that policymakers have been most anxious to keep frictionless.
Who actually pays, and who doesn’t
NPCI has been explicit that consumers will not bear the new cost. UPI app providers are barred from imposing platform fees or any other charges on customers for UPI transactions, and merchants are prohibited from passing the 0.4 per cent MDR on to buyers — meaning a shopper paying ₹3,000 via UPI pays exactly ₹3,000; the ₹12 fee is absorbed further up the payment chain, split among the acquiring bank, the payment app and other ecosystem participants. Small merchants receiving up to ₹100,000 per month through UPI are exempt from the fee altogether, and recurring payment mandates under UPI AutoPay attract no MDR regardless of value.
The fee structure is not uniform across sectors. A flat charge of ₹5 applies to transactions above ₹2,000 in specific categories — railways, telecom, insurance, fuel, electricity distribution, municipal water charges and piped natural gas among them — rather than the percentage-based rate, reflecting the government’s evident concern about touching essential services and utility payments too heavily. Capital-market transactions, covering mutual funds, securities, stockbroking and equity or debt-market purchases, attract a much smaller 0.02 per cent rate, capped at ₹300. The general 0.4 per cent MDR itself is capped at ₹300 for transactions above ₹75,000, meaning the fee’s proportional bite shrinks for very large payments even as its absolute value rises.
Why NPCI says the free ride had to end
The commercial logic NPCI has offered publicly rests on the cost of running the network itself. Industry estimates cited by NPCI put the annual cost of operating UPI — servers, fraud prevention, technical support and the surrounding cybersecurity infrastructure — at roughly ₹20,000 crore. Since 2020, this cost has been substantially underwritten by government subsidies to banks and payment companies rather than recovered from transaction fees, a model that worked well to drive adoption in UPI’s growth phase but that NPCI and industry bodies have argued is not commercially sustainable at UPI’s current, vastly larger scale. Vishwas Patel, chairman of the Payments Council of India, framed the change as intended to “sustain the growth of UPI” rather than “create profit pools for companies,” with revenue directed toward infrastructure, cybersecurity and fraud-prevention investment rather than accruing to the government as a tax. NPCI has also signalled that the government’s original incentive scheme for UPI was always meant as short-term support rather than a permanent subsidy — an important clarification, since it pre-empts the natural public reading of this move as a policy reversal rather than the planned endpoint of a temporary arrangement.
Credit and debit card fees offer a useful point of comparison: NPCI notes that credit-card merchant fees typically run from 1.5 to 2.5 per cent per transaction, with debit-card fees capped at 0.9 per cent. Against that backdrop, a 0.4 per cent MDR on UPI transactions above ₹2,000 — with sub-₹2,000 payments, small merchants and P2P transfers all remaining fee-free — is a comparatively light touch, and NPCI has argued the rate is low enough for most businesses to absorb without raising prices for consumers.
Why it matters
UPI is not simply a convenient app for urban Indians; it is critical infrastructure that underpins how several hundred million people — including a large share of India’s small merchants, street vendors and gig workers — transact daily, and its zero-cost model has been repeatedly cited internationally, including by central banks and payment regulators in other developing economies, as a template for financial inclusion at scale. Ending fee-free status for merchant payments above ₹2,000, even with consumer protections and small-merchant exemptions built in, marks a genuine inflection point for a system whose entire growth story has been built on being free. The test now is whether merchants — restaurants, retailers, service providers processing payments above the ₹2,000 threshold — absorb the 0.4 per cent cost quietly, as NPCI expects, or begin quietly nudging customers toward cash or card for larger purchases, or lobbying for the threshold or rate to be revisited. Either outcome would have consequences for India’s digital-payments trajectory that extend well beyond this single fee announcement, and the coming weeks of implementation — software and billing-system updates across acquiring banks, payment aggregators, fintech apps and corporate accounting platforms — will be the first real test of how smoothly the transition lands.
– Rashmi Kumari
Key facts
– MDR of 0.4% on UPI person-to-merchant transactions above ₹2,000, effective 15 October 2026; capped at ₹300 for transactions above ₹75,000
– Sub-₹2,000 transactions, P2P transfers, UPI AutoPay, and small merchants receiving up to ₹100,000/month via UPI remain fee-free
– Flat ₹5 fee (not percentage-based) for railways, telecom, insurance, fuel, electricity, water and gas payments above ₹2,000; 0.02% (capped at ₹300) for capital-market transactions
– Consumers cannot be charged the fee by merchants or platforms; UPI processed 24.51 billion transactions worth ~₹29.9 trillion in August 2026 alone
– Ends the zero-fee merchant model in place since 2020; estimated annual cost of running UPI is ~₹20,000 crore, previously subsidised by the government
