NPCI Clarifies Scope of New UPI Merchant Discount Rate to Safeguard Small-Value Transactions

Following intense public debate and a legal challenge brought before the Supreme Court regarding merchant transaction fees, the National Payments Corporation of India (NPCI) issued an official administrative clarification regarding the newly introduced Merchant Discount Rate (MDR) on unified payments network channels. Addressing payments industry stakeholders and financial institutions, NPCI leadership clarified that the 0.4 percent merchant fee structure applies strictly to specified person-to-merchant (P2M) digital transactions exceeding the ₹2,000 threshold. Regulators emphasized that over 75 percent of total daily digital payment volumes and 96 percent of individual transactions remain completely exempt from processing charges, ensuring that small street vendors, Kirana stores, and everyday retail customers incur zero operational costs under the updated framework. The clarification aims to reassure retail merchants and financial technology startups after market speculation raised concerns over widespread fee hikes across digital payment gateways. FinTech industry leaders and retail trade associations welcomed the structured framework, noting that preserving zero-cost processing for lower-ticket transactions sustains India's rapid digital financial inclusion while providing banks and payment aggregators with a viable economic model to maintain cybersecurity and digital infrastructure across high-value commercial channels.

Regulatory Clarification Counteracts Market Misconceptions

To eliminate confusion following reports regarding upcoming digital payment costs, the National Payments Corporation of India (NPCI) released official guidance clarifying the precise boundaries of the updated Unified Payments Interface (UPI) Merchant Discount Rate (MDR) framework. Scheduled to take effect on October 15, 2026, the updated policy is designed to support backend infrastructure, cyber security enhancements, and payment service provider sustainability without imposing costs on everyday consumers or micro-retailers.

NPCI emphasized that rumors suggesting a direct 18% Goods and Services Tax (GST) addition onto retail consumer payments or small store owners are false.

Overview: UPI MDR Framework Rules & Threshold Specifications

Payment / Category	Transaction Threshold	Applicable MDR Fee	Impacted Volume Share
Person-to-Person (P2P)	Any Amount	Zero MDR (100% Free)	Standard daily transfers
Person-to-Merchant (P2M)	Up to ₹2,000	Zero MDR (100% Free)	~96% of total P2M volume
Standard P2M Payments	Above ₹2,000	0.4% MDR (Capped at ₹300)	~4% of commercial volume
Micro-Merchants (P2PM)	Up to ₹1 Lakh/month	Zero MDR (Fully Exempt)	Street vendors & kirana stores
Concessional Sectors	Above ₹2,000	Flat ₹5 Fee (Fuel, Rail, Utilities)	Essential public utilities

Safeguarding Small Merchants and Essential Sectors

Under the clarified framework, over 96% of daily merchant transactions will remain completely untouched by payment processing fees. A major mechanism ensuring this protection is the Person-to-Person-Merchant (P2PM) classification. Small vendors, neighborhood kirana outlets, and roadside merchants receiving up to ₹1 lakh per month through UPI QR codes maintain absolute zero-MDR status, even if an individual customer executes a single transfer crossing ₹2,000.

UPI MDR Applicability Flowchart: -------------------------------- UPI Payment Executed │ ├── P2P Transfer ───────────────────────────────> ZERO MDR (Always Free) │ └── P2M Payment ├── Value ≤ ₹2,000 ──────────────────────> ZERO MDR (Free) │ └── Value > ₹2,000 ├── Small Vendor (P2PM ≤ ₹1L/mo) ──> ZERO MDR (Exempt) ├── Essential Sector (Fuel/Rail) ──> Flat ₹5 Fee └── Commercial Merchant ──────────> 0.4% MDR (Capped at ₹300)

For large commercial merchants processing transactions above ₹2,000, the 0.4% MDR is subject to a maximum cap of ₹300 per transaction (reached at ticket sizes of ₹75,000 and above). Furthermore, high-frequency, thin-margin sectors—including fuel pumps, Indian Railways ticket bookings, telecommunications, insurance, and municipal utility bills—will operate under a flat concessional fee of ₹5 per high-value transaction rather than the variable 0.4% rate.

Reaffirming Zero Consumer Surcharges

NPCI reiterated that merchants are explicitly prohibited from passing on MDR fees to end consumers at POS checkouts or digital payment gateways. Individual users paying via bank-to-bank UPI apps will continue to enjoy completely free transactions across all ticket sizes.

The small revenue pool generated from higher-tier commercial transactions will be routed across acquiring banks, fintech payment apps, and infrastructure providers to fund system redundancy, AI-driven fraud mitigation software, and network scaling.