Overview
The NPCI has issued new rules for the MDR on UPI. From 15 October 2026, a 0.4% charge will apply to payments of ₹2,000 or more made to mid‑size and large merchants.
Key Developments
- Only about 2.5% of UPI transactions by volume will attract the MDR.
- All P2P transfers remain free, irrespective of amount.
- Payments to merchants up to ₹2,000 stay exempt.
- Small merchants (including street vendors) receiving up to ₹1 lakh per month via P2PM are also exempt.
- Essential‑service sectors (railways, telecom, insurance, fuel, agri‑inputs) will face a flat ₹5 per transaction MDR for amounts ≥₹2,000.
- Capital‑market payments (mutual funds, stockbrokers, equities) will be charged 0.02% capped at ₹300 per transaction.
Important Facts
The MDR‑bearing transactions represent roughly 20% of the total value of all UPI payments, translating to an estimated revenue of ₹2,400 crore per month. The revenue distribution is hierarchical: the payer’s bank receives the largest share, followed by the merchant’s bank, the UPI app, and other processors.
Bank‑wise, Yes Bank dominates both the consumer‑side and merchant‑side UPI usage, with ICICI Bank and Axis Bank trailing. Among payment apps, PhonePe and Google Pay together handle nearly 80% of transaction volume, and will therefore capture most of the MDR earnings.
Exam Relevance
Understanding the MDR framework is crucial for GS‑3 (Economy) as it illustrates how digital payment ecosystems generate revenue for banks and fintech firms. The policy also reflects the government’s intent to keep low‑value and essential‑service transactions affordable, aligning with financial inclusion goals. Candidates should note the role of NPCI in shaping payment‑system architecture, and the competitive dynamics among private banks and UPI apps.
Way Forward
Policymakers may need to monitor the impact of MDR on small merchants and assess whether the exemption thresholds remain adequate as transaction volumes grow. Further, the revenue share model could be revisited to ensure a level playing field for newer fintech entrants. Aspirants should watch for future revisions that could affect digital‑payment adoption, financial‑inclusion metrics, and the fiscal health of banks.