Proposed UPI MDR above Rs 2,000 to be borne by merchants, not consumers

Government sources say a proposed 0.4% MDR on UPI merchant payments above Rs 2,000, effective October 15, 2026, will not be passed to customers. Small merchants would retain exemptions, while fee proceeds would be shared among banks, gateways and UPI apps.

— Source publishedFri, 25 Sept, 2026, 10:20 IST·First seen Fri, 25 Sept, 2026, 10:29 IST·Source YourStory

What happened

Government sources said the proposed 0.4% MDR on UPI merchant payments above Rs 2,000 will be borne by merchants, not consumers. Small merchants remain exempt,

Key facts

  • 0.4% MDR on person-to-merchant UPI transactions above Rs 2,000
  • Rs 300 maximum MDR cap for transactions of Rs 75,000 or more
  • 40% of MDR to customers' banks
  • 30% to payment gateway
  • 20% to UPI app
  • 10% to sponsoring bank
  • 18% GST on merchant fee
  • Rs 5 flat fee for essential-services transactions above Rs 2,000
  • 0.02% MDR for capital-markets transactions
  • Rs 1 lakh monthly UPI QR collections exemption for small merchants
  • 96% of merchant transactions shielded
  • 5% of MDR collections to small-merchant UPI promotion fund

Why this matters

Payment providers with scaled merchant-acquiring, gateway and UPI capabilities could become more valuable partnership or acquisition targets as MDR revenue sharing reshapes the UPI ecosystem.

What to watch

  • Final government or NPCI notification confirming the October 15, 2026 start date, applicable merchant categories, and enforcement rules.
  • Whether the Rs 2,000 threshold applies per transaction, per order, per customer, or after refunds and split tender.
  • Definition of exempt small merchants, including turnover limits, GST linkage, QR classification, and online-seller treatment.
  • Any MDR ceiling, interchange allocation, gateway fee treatment, GST treatment, or prohibition on indirect payment-method price differentiation.
  • Bank, PSP, gateway, and UPI-app announcements on merchant pricing, incentive changes, settlement terms, and routing products.
  • Evidence of reduced high-value UPI promotional funding, rising card-EMI incentives, or basket-value shifts following implementation.
  • Merchant association litigation, lobbying, or coordinated requests for delayed rollout and category exemptions.
  • Model payment acceptance cost by UPI ticket band, merchant category, store format, and online versus offline checkout; isolate exposure above Rs 2,000.
  • Renegotiate acquiring, gateway, and bank contracts before the proposed effective date, seeking MDR caps, blended pricing, volume rebates, and settlement-service offsets.
  • Redesign promotion funding so high-ticket UPI cashback and discount offers are evaluated against incremental margin after MDR.
  • Test compliant tender-steering options, including card-EMI offers, account-to-account alternatives, loyalty incentives, and payment-method-neutral basket thresholds.
  • Prepare merchant communications and checkout training that avoid any explicit UPI surcharge while explaining any revised promotional or financing offers.
  • Track whether marketplace sellers, franchisees, and third-party delivery merchants bear MDR directly or through revised platform commission structures.

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