UPI Changes Explained: What Will Remain Free and What Will Attract Charges?

New Delhi: The new UPI framework has clarified that person-to-person (P2P) transactions will continue to remain completely free, irrespective of the amount transferred.

Payments made to merchants up to ₹2,000, as well as transactions covered under the zero-MDR framework for small merchants, will also remain free. As a result, around 96% of all person-to-merchant (P2M) transactions are expected to remain unaffected.

MDR will apply only to specified merchant transactions above ₹2,000. Importantly, customers will not have to pay MDR directly.

Here are the key questions and answers about the new framework:

What is MDR?

MDR, or Merchant Discount Rate, is a charge within the merchant payment ecosystem. It is not a tax or a fee collected by the government or NPCI.

The amount is distributed among participants in the payment ecosystem, including banks, payment service providers and UPI application providers, to support the operation and expansion of the UPI network.

Will person-to-person UPI payments become chargeable?

No.

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

Individuals will not be charged a transaction fee, platform fee or any other charge for sending or receiving money through UPI.

P2P transactions, which account for around 70% of the total transaction value, will therefore remain outside the MDR framework.

Will UPI payments to merchants up to ₹2,000 remain free?

Yes.

All person-to-merchant (P2M) UPI transactions of up to ₹2,000 will remain free of MDR. Customers will not have to pay any additional charge when making such payments.

Will small merchants continue to get zero MDR?

Yes.

Small merchants, including street vendors and neighbourhood shops, receiving up to ₹1 lakh per month through UPI QR codes under the P2PM category, will continue to enjoy zero MDR on all transactions.

The provision is intended to protect small businesses from additional payment costs.

Which UPI transactions will attract MDR?

A nominal MDR of 0.4% will apply to specified P2M transactions above ₹2,000.

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

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

Will essential-sector payments attract MDR?

Yes, but at a specified flat rate.

Transactions above ₹2,000 in essential and thin-margin sectors such as railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat MDR of ₹5 per transaction.

What about mutual funds and stock market transactions?

Payments relating to mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02%, capped at ₹300 per transaction.

The lower rate is intended to support continued retail participation in formal financial markets.

Will customers have to pay MDR?

No.

MDR is a charge within the merchant payment ecosystem and is not a direct charge on customers making UPI payments.

Banks have been advised to ensure that merchants do not pass the MDR cost on to customers. UPI application providers are also prohibited from imposing platform fees or hidden charges.

Will there be a monthly limit on free UPI transactions?

No.

Individuals will continue to have unlimited free usage of UPI, with no monthly quotas, volume restrictions or tiered caps on free transactions.

Daily transaction limits prescribed by banks and NPCI — generally ranging from ₹1 lakh to ₹5 lakh, depending on the transaction category — are security and risk-management measures. They are not charging thresholds.

How many merchant transactions will actually be affected?

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

This means approximately 96% of merchant transactions will remain unaffected, either because they are below the ₹2,000 threshold or because they are covered under the zero-MDR framework for small merchants.

How will small merchants benefit from the new framework?

A dedicated fund will be established to promote UPI adoption among small merchants.

An amount equivalent to 5% of total MDR collections will be contributed to the fund. It will support wider UPI acceptance, sustained usage and greater participation of small businesses in India’s digital payments ecosystem.

Why has the new framework been introduced?

The framework has been introduced under the Payment and Settlement Systems Act, 2007, following deliberations by the UPI Steering Committee on applicable rates, operational arrangements and consumer safeguards.

The stated objective is to ensure the long-term sustainability of the UPI ecosystem while keeping person-to-person payments free and protecting individuals and small merchants from additional charges.

Revenue generated from larger merchant transactions will support banks, payment service providers and UPI application providers in maintaining and expanding payment infrastructure, including in rural and semi-urban areas.

The framework is also in line with the recommendation of the Standing Committee on Finance, which emphasised the need for a viable revenue model to support the continued growth of India’s digital payments ecosystem.