The government announced the UPI (Unified Payments Interface) Merchant Discount Rate (MDR) framework on 15 September 2026, with the charges set to take effect from 15 October 2026. The framework is as follows: (i) a 0.4% rate on person-to-merchant (P2M) payments above ₹2,000; (ii) no charge on P2M payments up to ₹2,000; (iii) a cap of ₹300 per transaction for payments of ₹75,000 and above; and (iv) person-to-person (P2P) transfers remain free.
As expected, the “Naraz Fufas” (Paternal Uncle-in-law), led by the muscular and dynamic Leader of Opposition, sprang into action and released videos on social media platforms demanding the withdrawal of MDR, which they termed a “UPI tax”. There appears to be a deliberate and mischievous attempt to craft a narrative that merchants will pass this additional charge on to the customers by raising prices, thereby burdening common people and shopkeepers, fuelling inflation, and potentially pushing more transactions back to cash.
In reality this is far from truth. Let me analyse this for you with examples from last financial year’s data.
UPI Transactions (FY2025-2026): i) Total number of transactions in a year is around 24,162 crore, ii) Total value of transactions is around ₹314 lakh crore, iii) Approximately 96% of person-to-merchant (P2M) transactions have remained under ₹2,000. This percentage is an average pattern, though the volume has increased over years. Only 4% are high value UPI transactions.
MDR and Basis Points (BPS): In finance, MDR stands for Merchant Discount Rate, a fee charged to a merchant by a bank or payment processor for accepting digital payments such as credit cards, debit cards, or digital wallets (Google Pay, PhonePe, Paytm etc.) which is linked to bank accounts for quick QR-code scans. Basis points (bps) are a standard unit used to express percentage changes in financial metrics such as interest rates and bond yields; 100 bps = 1%, so 40 bps = 0.4%.
What the government has proposed: Until now, UPI payments have been free for merchants, while MDR has been payable by them on credit and debit card transactions to their acquiring banks. From 15 October 2026, merchants will have to pay an MDR on person-to-merchant (P2M) UPI payments above ₹2,000 at a rate of 0.4% (40 bps), i.e., ₹4 per ₹1,000. Let me give an example. If you buy a mobile phone for ₹50,000, you pay only ₹50,000; the merchant pays ₹200 as MDR (0.4% of ₹50,000) to the government. In case you buy a costlier one for ₹75,000, the merchant pays ₹300, which is the maximum MDR cap. For any item worth ₹75,000 or more paid via UPI, the merchant’s MDR remains capped at ₹300.
Under the new framework, UPI users do not pay anything extra; the charge is borne only by the merchant or business and paid to the government.
How it compares with credit and debit cards: In India, the MDR on credit cards is typically 1.5% to 2.5% of the transaction value for domestic Visa/Mastercard credit cards, with higher rates for premium and foreign cards that go up to 5%. There is no cap, so the higher the transaction value, the more the merchant pays to the acquiring bank. Credit card MDR is market‑driven, and the exact rate varies by bank, card network, merchant category, and payment gateway.
MDR on debit cards depends on the card network and merchant size. For Visa/Mastercard debit cards, the RBI caps MDR at 0.9% (90 bps). Let me take the example of a cell phone. Suppose you buy an Apple, iPhone for ₹1.0 lakh. In case of credit card payment, the merchant pays 1.5% to 2.5% MDR, i.e., 150–250 bps, which works out to ₹1,500 to ₹2,500. If you use a debit card, the merchant pays 0.9% MDR, i.e., 90 bps, or ₹900. And if you use UPI, then the merchant pays only ₹300, thanks to the MDR cap. Given these costs, merchants clearly prefer UPI over card payments.
If the merchant insists: In case you do a UPI transaction while purchasing something or make a payment in a restaurant and the MDR is added to your bill. There are two ways: you can lodge a complaint as it is illegal or just make the payment and use the payment gateway transaction history to recover the amount. Suppose you have made a UPI payment of ₹1.0 lakh using Google Pay towards a gala birthday party in a 5-star hotel and an amount of ₹300 is added to your bill towards 0.4% MDR (40 bps with a cap of ₹300). What you need to do is, go to the Google Pay app and then to transaction history and click on the transaction, and then on “contact support”. Just type “UPI dispute” in the chat box and within 24 to 48 hours, ₹300 will be credited back to your account. Bingo!
Utility Payment: For utility and essential-service UPI payments such as railway bookings, electricity bills, water, piped gas, telecom, insurance, and fuel, the new MDR framework sets a flat ₹5 per transaction for payments above ₹2,000, not a percentage charge. Suppose you book 10 tickets on Vande Bharat train from Hyderabad to Visakhapatnam and pay ₹32,000, then IRCTC pays to the government a flat MDR of ₹5 only on ten tickets. You don’t have to pay even this ₹5.
Why the government is levying MDR: Until now, the government has been providing an annual grant of around ₹20,000 crore to support UPI’s sustainability. With the system now matured and transaction volumes surging, a nominal 40 bps (0.4%) MDR on high‑value merchant payments is entirely justified, especially when merchants already pay significantly higher MDR on credit and debit card transactions to acquiring banks. The objective is to make the UPI ecosystem financially self‑sustaining and not to “tax” UPI users, as falsely propagated by opposition parties to corner the government.
With lakhs of UPI transactions every day, the platform requires continuous investment in infrastructure, cybersecurity, fraud prevention, and technology upgrades; all these costs cannot be met through subsidies alone. By levying a small fee only on person‑to‑merchant (P2M) payments above ₹2,000 (and capping it at ₹300), the framework creates a modest revenue stream that helps banks, payment service providers, and app providers recover costs and compete, while keeping individuals and small merchants largely protected. A portion of the collections is also earmarked for a small‑merchant fund to expand UPI acceptance in rural and semi‑urban areas, ensuring that the move supports broader financial inclusion rather than burdening the lower‑income segment.
As the Finance Ministry has put it rightly, the aim is to make UPI “durable, competitive, and inclusive”. A system that grows with India’s digital economy without compromising its reach to the last mile.
Let us separate out the signal from noise. History is a witness that those who bring about change always move ahead, and those who find faults always stand there and just talk. Our Naraz Fufas are so accustomed to darkness that even in sunlight they see only spots.
