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The new UPI fee on shop payments: what the merchant discount rate is, and who ends up paying
UPI payments to shops have been free for merchants since 2020. A fee on larger payments was due on 15 October and has been put off until after Diwali. How it works, what is exempt and whether customers will feel it.
The short answer
The merchant discount rate (MDR) is a small fee a shop or business pays on each digital payment it receives, shared among the banks, payment apps and the network that move the money. UPI has carried no MDR since January 2020. Under the new rules, merchants will pay 0.40% on UPI payments above ₹2,000, capped at ₹300, from a date after Diwali. Payments between people, payments up to ₹2,000 and small merchants are exempt, and the Finance Ministry has told banks the cost should not be passed to customers.
What is the merchant discount rate?
It is the fee a shop or business pays for accepting a digital payment, taken as a small slice of each payment it receives.
When you pay a shop by card, the shop does not get the full amount. A percentage goes to the chain that made the payment possible: the customer’s bank, the shop’s bank, the company that supplied the card machine or QR code, and the network operator. That slice is the merchant discount rate, or MDR. Card payments in India have always carried one.
UPI has not. Since 1 January 2020 the government has required UPI and RuPay debit card payments to merchants to be free of MDR, and has paid banks a yearly incentive to make up part of the cost.
What is changing?
From a date after Diwali, merchants will pay 0.40% on UPI payments above ₹2,000, with the fee capped at ₹300 a payment.
The rates were set by the UPI steering committee and announced by the National Payments Corporation of India (NPCI), which runs the network, in September. The fee was due to start on 15 October. This week NPCI said it would instead begin “immediately post Diwali on a date to be notified separately”, citing the festive season.
A few kinds of payment have their own rates. Some essential payments, such as telecom, railway and utility bills, will carry a flat ₹5 a transaction above ₹2,000. Payments for mutual funds and securities carry 0.02%, also capped at ₹300.
How much is that in rupees?
About ₹4 on every ₹1,000 paid, once the payment crosses ₹2,000.
A ₹5,000 payment would cost the shop ₹20. A ₹10,000 payment would cost ₹40. The cap of ₹300 is reached at ₹75,000, so a payment of ₹2 lakh would also cost ₹300.
What stays free?
Most everyday UPI use. The fee does not touch money sent between people, and it does not apply to any shop payment of ₹2,000 or less.
UPI payments under the new rules
The small-merchant exemption has a limit. A trader whose UPI receipts stay above ₹1 lakh a month for three months in a row is treated as a regular merchant and starts paying.
Who actually pays?
On paper, the merchant. The fee is deducted from what the shop receives, not added to what the customer pays. The Finance Ministry has advised banks to make sure merchants do not pass it on to customers.
In practice, businesses with thin margins may try to recover the cost somewhere, through prices, a minimum for UPI payments or a nudge towards cash. How far that happens will depend on competition in each trade. A jeweller or electronics shop taking large payments every day will notice the fee. A tea stall will not, because almost all of its payments are below ₹2,000.
Why bring in a fee at all?
Because running UPI costs money, and the payment companies say free payments cannot be sustained.
NPCI has said the fee is meant to pay for maintaining and building the payments system, which costs about ₹20,000 crore a year. Banks and payment apps have long argued that zero MDR gave them little reason to invest in UPI for merchants.
The scale is large. In September UPI handled a record average of 802 million transactions a day, and 24.07 billion over the month. Adhil Shetty of BankBazaar has estimated that merchant payments above ₹2,000 are only about 4% of merchant transactions by number, but roughly two-thirds by value. That is why a fee on a small share of payments could bring in a large sum: up to about ₹16,000 crore a year, by one estimate.
Where does the money go?
It is shared among everyone in the chain. That includes the customer’s bank, the merchant’s bank, the app the customer uses, the payment aggregator that serves the merchant, and NPCI. The exact split has not been made public.
What should shoppers watch for?
Mainly whether shops start treating large UPI payments differently. Nothing changes for payments to friends and family, for small purchases or for autopay. For bigger purchases after Diwali, a request to pay extra for UPI, or a refusal to accept it, would go against the government’s stated intent.