Why Does the Government Want a Fee on UPI Transactions Above ₹2,000? Will It Bring Back Cash?

New Delhi: India’s UPI payment system is set for a change in its merchant fee structure from October 15, 2026. The new framework will introduce a 0.4% Merchant Discount Rate (MDR) on eligible merchant UPI payments above ₹2,000.

Key Points

• Above ₹2,000: 0.4% MDR on eligible merchant UPI payments
• ₹2,000 or below: No new fee
• Maximum MDR: ₹300 per transaction
• Effective from: October 15, 2026
• P2P transfers: Remain completely free
• Customers: No direct MDR payment
• Special sectors: Railways, telecom, insurance and fuel will have a flat ₹5 MDR on eligible transactions above ₹2,000
• Applies to: Eligible Person-to-Merchant (P2M) transactions

Why Does the Government Want MDR on UPI?

The government says the new framework is aimed at ensuring the long-term sustainability of the UPI ecosystem.

UPI has become one of India’s most widely used payment systems. Operating and expanding such a large digital payment network involves costs for banks, payment service providers and other participants.

The new MDR structure creates a revenue stream from certain larger merchant transactions.

The MDR will be distributed among participants in the payment ecosystem, including banks, payment service providers and UPI application providers.

Importantly, MDR is not a tax or a fee collected by the government or NPCI.

Who Will Actually Pay MDR?

The MDR applies to eligible Person-to-Merchant (P2M) transactions above ₹2,000.

For example, if an eligible merchant transaction is ₹10,000, the 0.4% MDR would be ₹40.

However, customers are not supposed to pay this ₹40 separately.

MDR is a charge within the merchant payment ecosystem. Banks have been advised to ensure that merchants do not pass the MDR cost on to customers.

For transactions of ₹75,000 and above, the MDR will be capped at ₹300 per transaction.

What Will Remain Free for Common People?

Sending Money to Another Person

All person-to-person (P2P) UPI transactions will remain completely free, regardless of the amount.

Whether someone sends ₹500, ₹5,000 or ₹50,000 to another person, there will be no MDR.

Receiving Money

Receiving money through UPI from another individual will also remain free.

Merchant Payments Up to ₹2,000

Merchant UPI payments of ₹2,000 or below will remain free of MDR.

This means most small, everyday purchases will not face the new MDR.

Small Merchants

Small merchants covered by the zero-MDR framework will continue to enjoy zero MDR.

Small merchants receiving up to ₹1 lakh per month through UPI QR codes under the P2PM category will remain protected from MDR.

This includes many street vendors, neighbourhood shops and other small businesses.

How Many Transactions Will Be Affected?

The government says the impact will be limited.

According to the framework, MDR will apply to only around 4% of merchant transactions.

Therefore, approximately 96% of P2M transactions will remain unaffected.

This means the new structure is primarily targeted at certain higher-value merchant transactions rather than ordinary small UPI payments.

What About Railways, Telecom and Fuel?

Certain essential and thin-margin sectors will have a separate MDR structure.

Eligible transactions above ₹2,000 in sectors including railways, telecommunications, insurance and fuel will attract a flat ₹5 MDR per transaction.

This provides a predictable payment cost for these sectors.

What About Mutual Funds and Stockbrokers?

Capital-market-related payments will attract a lower MDR of 0.02%, capped at ₹300 per transaction.

This covers payments related to areas such as mutual funds, securities, stockbrokers and dealers.

Where Will the Money Go?

The MDR collected from eligible transactions will be shared among participants in the payment ecosystem.

The framework also proposes a dedicated fund to support small merchants.

An amount equal to 5% of total MDR collections will be contributed to this fund to encourage wider UPI acceptance and usage among small businesses.

Why Is This Important?

The change is not simply about introducing a fee for using UPI.

It is about creating a revenue model for the UPI ecosystem while keeping the service free for individuals.

For years, users have become accustomed to UPI as a free way to transfer money and make small payments. The new framework attempts to preserve that experience while generating revenue from certain larger merchant transactions.

Could This Bring Back Cash Transactions?

The new MDR is unlikely to affect everyday UPI users, as P2P payments and most small merchant payments remain free.

However, businesses handling larger-value eligible merchant transactions, particularly those with thin profit margins, could have more reason to consider cash to avoid payment costs.

Whether they actually shift will depend on convenience, customer preference and how merchants absorb the MDR.

India has spent years moving from cash towards digital payments, with UPI playing a major role in that shift. The impact of the new MDR on this trend will become clearer after the framework takes effect.

For now, the key point is simple: UPI is not becoming a paid service for common users. The new MDR mainly changes how certain larger merchant transactions are charged within the payment ecosystem.