NPCI releases MDR framework for UPI transactions — Here's what changes for merchant payments

The National Payments Corporation of India (NPCI) on Monday announced the merchant discount rate (MDR) for select UPI transactions. There is “no impact on any person-to-person transactions”, as per the official release.

As per the NPCI's FAQ document, 0.4% MDR will be introduced on Person-to-Merchant (P2M) UPI transactions above ₹2,000, with charges capped at ₹300 per transaction for transactions of ₹75,000 and above.

Notably, UPI will continue to remain completely free for all P2P transactions, irrespective of the amount transferred. “Therefore, UPI transactions accounting for 70% of the total transaction value will remain completely outside the MDR framework,” as per a Finance Ministry statement.

MDR on UPI payments: What changes for merchants?

According to the Ministry of Finance press release, all person-to-merchant transactions up to ₹2,000 will remain free of MDR. Thus, close to 96% of merchant transactions will remain free, as “payments to merchants up to ₹2,000, along with transactions covered under the zero-MDR framework for small merchants, will also remain free”.

Small merchants, including street vendors receiving up to ₹1 lakh per month through UPI QR codes under the Person-to-Person-Merchant (P2PM) category, will continue to enjoy zero MDR on all transactions. “This provision will protect street vendors, neighbourhood shops and other small businesses from additional payment costs,” it added.

Here's what changes for merchants:

• MDR of 0.4% will apply to P2M transactions above ₹2,000.
• For transactions of ₹75,000 and above, the MDR will be capped at ₹300 per transaction.
• Transactions above ₹2,000 in essential and thin-margin sectors, including railways, telecommunications, insurance, fuel and agricultural inputs, will attract a flat MDR of ₹5 per transaction.
• Payments relating to mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02%, capped at ₹300 per transaction.

Most merchant transactions unaffected, support for small merchants

The release cited data analysis to state that the MDR imposed, will in effect, only apply to around 4% of all merchant transactions, as the remaining are either below the ₹2,000 threshold or covered by the zero-MDR framework for small merchants.

“The framework therefore protects individuals, micro-enterprises and small businesses while introducing a limited charge on larger merchant transactions,” it stated.

According to the NPCI's FAQ document, “small vendors operate under specialised micro-merchant account classifications (P2PM), that protect them from commercial fees. The MDR framework is specifically structured in a way that small businesses in the unorganised retail sector can accept digital payments without any margin deduction.”

Further, the ministry said that it will extend support to small merchants by establishing a dedicated fund of an amount equivalent to 5% of MDR collected. “The fund will support wider UPI acceptance, sustained usage and the inclusion of small businesses in India’s digital payments ecosystem,” it added.

What is MDR? Why is it being charged?

According to the release, MDR is not a tax or charge collected by the government or NPCI, but is distributed among payment ecosystem participants, including banks and payment application providers, to support the operation and continued expansion of the UPI ecosystem.

“Introduced under the Payment and Settlement Systems Act, 2007, following detailed deliberations by the UPI Steering Committee, the framework seeks to ensure the long-term sustainability of UPI while protecting individuals and small merchants from additional charges,” it stated.

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

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