UPI Merchant Fees: New Charges for Large Payments, Small Traders Protected

India's Unified Payments Interface (UPI) is introducing a merchant discount rate (MDR) on payments above Rs 2,000, effective October 15. The fee, announced by the National Payments Corporation of India (NPCI), marks the end of six years of zero charges for merchants, while consumers remain entirely unaffected. Small vendors and street traders are explicitly exempted from the new levy.

What is the new UPI merchant fee structure?

Under the new framework, merchants will pay a fee of 0.4 percent on person-to-merchant (P2M) UPI payments exceeding Rs 2,000. For transactions of Rs 75,000 and above, the charge is capped at Rs 300. Payments up to Rs 2,000, which account for over 95 percent of P2M volume, attract no fee at all. The system takes effect on October 15, allowing banks, payment aggregators, and fintech applications time to update their systems.

Will UPI consumers pay any charges?

No. UPI remains free for all consumers, regardless of transaction size. Person-to-person transfers, including self-transfers between a user's own accounts, stay free for both sender and receiver, with no monthly limits. UPI applications are explicitly prohibited from charging platform fees on UPI payments. Scanning a QR code at a local market, kirana store, or tea stall remains free, whatever the amount.

Can merchants pass the fee on to customers?

Not officially. Merchants cannot pass on MDR charges to customers paying by UPI; consumers pay only the posted price. The NPCI argues that merchants will absorb the cost as routine overhead, offset by increased footfall, higher ticket sizes, and reduced cash-handling risk, and therefore have no incentive to raise shelf prices.

Are small merchants and street vendors protected?

Yes. Small merchants in the P2PM category, defined as those receiving up to Rs 1 lakh per month via UPI QR into their accounts, pay zero MDR regardless of transaction size. Even a payment above Rs 2,000 to a P2PM merchant carries no charge, since applicability depends on the merchant's account category, not the individual transaction. Existing QR codes and soundboxes work unchanged, and no re-registration or GST registration is required.

Do all sectors pay the 0.4 percent rate?

No. Certain categories, including fuel, insurance, telecom, railways, utilities (electricity, water, piped gas), and education, pay a flat Rs 5 per transaction above Rs 2,000 instead of a percentage. This protects thin-margin and public-service sectors from cost escalation. Capital-market payments, such as mutual funds, brokers, and securities, attract just 0.02 percent, capped at Rs 300, to encourage retail participation.

What about recurring mandates and credit-linked UPI?

Recurring mandates for utility bills, OTT subscriptions, and systematic investment plans carry no prescribed MDR. Credit-linked UPI, such as RuPay credit cards on UPI or credit lines, falls outside this framework and follows standard credit-card rules, since those transactions are short-term loans funded by issuing banks. The new MDR applies only to direct account-to-account UPI payments.

Why is the charge being introduced?

UPI processed 24.51 billion transactions worth Rs 29.9 lakh crore in August alone, nearly 800 million per day. Running the system, including servers, cybersecurity, fraud detection, and bank support, costs an estimated Rs 20,000 crore annually. Government incentives were bridge funding, never a permanent substitute, and budget dependence creates uncertainty. The NPCI states that MDR proceeds remain within the payments ecosystem, funding infrastructure, innovation, and security. It further argues that a commercial revenue model allows smaller fintechs to compete where only deep-pocketed players could previously absorb losses.

How does the UPI fee compare with card fees?

Favourably. Credit-card MDRs typically run between 1.5 and 2.5 percent, and debit cards up to 0.9 percent. At 0.4 percent with a Rs 300 ceiling, UPI remains the cheapest digital acceptance mode for merchants. Before the 2020 waiver, UPI itself carried an MDR of up to 0.3 percent.

Does this mean the end of support for small merchants?

No. A dedicated fund carved out of MDR proceeds will subsidise payment infrastructure in tier-III to tier-VI centres, including the Northeast, Jammu and Kashmir, and Ladakh. It will also finance merchant onboarding and incentives for small-merchant transactions, aligning with schemes such as PM SVANidhi and PM Vishwakarma. The detailed framework will take three months to finalise.

What remains to be decided?

The division of the fee is still to be worked out. The UPI and Services Steering Committee, headed by the NPCI, will decide operational criteria, including how MDR revenue is shared among issuing and acquiring banks, payment apps, and aggregators, along with category-wise caps. The small-merchant fund's design follows within three months, in consultation with the Reserve Bank of India.