UPI MDR from 15 October: How merchant charges compare with credit, debit card fees and credit-linked UPI

The National Payments Council of India (NPCI) has announced a merchant discount rate (MDR) on select UPI transactions conducted from person to merchant, effective from 15 October.

The revised framework, published on its official website on Tuesday, has kept 95% of low-value UPI transactions below ₹2,000 and small merchant transactions (P2PM) completely free.

While Union Finance Minister Nirmala Sitharaman clarified that consumers would continue to use UPI free of charge, some confusion persisted. The latest framework reiterates that consumers will transact free of cost using UPI, as they have been doing until now.

“Consumers making payments through UPI will not face any charges. Individual account holders can continue using UPI applications for all routine, daily expenses without worrying about any charges. The MDR policy ensures that UPI remain free and accessible for all citizens across India,” NPCI said.

So, who will pay extra charges?

For certain transactions above ₹2,000, a flat MDR of ₹5 will be applicable. Other person-to-merchant (P2M) UPI transactions above the ₹2,000 threshold will attract an MDR of 0.4%.

The 0.4% charge will be capped at ₹300 per transaction, thereby limiting the fee applicable to higher-value payments.

The categories subject to the flat ₹5 charge include payments for Indian railways, telecom services, insurance and fuel when the transaction value exceeds ₹2,000.

A separate, much lower MDR of 0.02% will apply to capital-market-related UPI payments. This category includes transactions involving mutual funds, securities, stock brokers and dealers. In such cases, too, the MDR will also be capped at ₹300 per transaction.

The initiative aims to expand UPI acceptance among small merchants while ensuring that consumers making low-value payments are not impacted.

What are rates for UPI MDR, traditional debit, credit card charges?

NPCI said that UPI MDR is structured to be much lower than all traditional card-based transaction fees.

Standard credit card MDRs typically range from 1.5% to 2.5% per transaction, while debit card MDRs are capped up to 0.90%, according to the payment body's FAQs section available online.

By setting the baseline UPI MDR at 0.4% on transactions above ₹ 2,000 and capping it at ₹300 for high-value purchases, UPI remains the most affordable digital payment acceptance tool for commercial enterprises, NPCI said.

It also maintained that this cost difference will help merchants lower their payment processing expenses while accepting digital transactions.

What happens to credit-linked UPI payments?

Credit card-linked UPI payments will not fall under the new 0.4% MDR regime, the government has clarified, offering relief to consumers who use credit cards or linked credit facilities to make UPI payments.

UPI payments made through RuPay credit cards linked to UPI, as well as pre-sanctioned bank credit lines, involve credit extended by the issuing bank. Such transactions consequently continue to be governed by the applicable credit card and credit-product regulations.

This is because such transactions involve short-term loans funded by issuing banks, so the issuing banks' standard guidelines remain separate.

The revised MDR regime specifically targets direct user-to-merchant UPI transactions via bank accounts and does not extend to credit-linked payments, as per the official release.

What is MDR and how does it work?

Regulated by the Reserve Bank of India (RBI), MDR is the fee that businesses pay to banks and payment service providers for processing the online payments made by customers.

Since 2020, this rate has been nil for UPI and RuPay debit card transactions, as the central government has sought to promote digital payments across the country.

For example, if a customer makes a ₹2,000 purchase using a credit or debit card, the payment is routed through the card network and the banks involved. A small portion of the transaction value is deducted as a charge, and the merchant receives the remainder.