Finance Minister Nirmala Sitharaman has said the Merchant Discount Rate on specified UPI merchant payments above Rs 2,000 will not be passed on to customers, seeking to draw a distinction between the new merchant charge and a tax imposed by the government.
“This is not a tax, this is not a cess, and it is not even a surcharge,” Sitharaman told Press Trust of India in an exclusive interview. “The collection is not going to the Consolidated Fund of India.”
The 0.4% MDR applies to specified person-to-merchant UPI transactions above Rs 2,000 under the new framework. The finance ministry has separately said customers cannot be charged the MDR and banks have been advised to ensure merchants do not pass the cost on to consumers.
Sitharaman told PTI that the merchant, rather than the customer, would bear the charge and that the money would remain within the payments ecosystem.
“The merchant is the one who is going to pay. That money is not coming to the Government of India and we are not imposing it. And this will not be passed on to the customer,” she said.
She also dismissed allegations that the MDR amounted to an additional government levy as a “complete misconception”, saying the proceeds would be shared among entities involved in processing digital payments rather than accrue to the exchequer.
How the new UPI MDR works
The government announced the new framework earlier this month after amending the legal framework governing payment systems.
Under the rules, all person-to-person UPI transactions remain free irrespective of value. Person-to-merchant payments of up to Rs 2,000 also remain free of MDR.
A 0.4% MDR applies to specified merchant transactions above Rs 2,000. For transactions of Rs 75,000 and above, the charge is capped at Rs 300, according to a finance ministry statement issued on September 15.
The ministry estimates that about 96% of UPI merchant transactions will remain outside the MDR framework, either because they fall below the Rs 2,000 threshold or qualify for the zero-MDR treatment available to small merchants.
Small merchants, including street vendors receiving up to Rs 1 lakh a month through UPI QR codes under the P2PM category, will continue to face zero MDR on all such transactions, the ministry said.
Essential and thin-margin sectors including railways, telecom, insurance, fuel and agricultural inputs will attract a flat Rs 5 MDR for transactions above Rs 2,000. Payments involving mutual funds, securities, brokers and dealers will attract an MDR of 0.02%, capped at Rs 300.
The new merchant charge is due to take effect from October 15, according to PTI.
‘Similar to card payments’
Sitharaman compared the arrangement with the MDR already paid by merchants when customers use debit and credit cards.
“If you purchase an item worth Rs 5,000, the bill reflects that exact amount plus GST, of course, but the MDR is not added to it,” she told PTI.
She said merchants and payment providers already manage such charges among themselves for card transactions and argued that the same principle would apply to UPI MDR.
The finance ministry’s September 15 clarification said MDR is a charge within the merchant-payment ecosystem and is not collected by either the government or NPCI. It is distributed among banks, payment service providers and UPI application providers.
UPI app providers have also been prohibited from imposing platform fees or hidden charges on individuals under the new framework, while person-to-person transfers will remain free regardless of value.
A shift from the earlier zero-MDR regime
UPI person-to-merchant payments had been under a zero-MDR regime since January 2020.
As recently as March 2025, the government’s incentive framework provided zero MDR for UPI merchant transactions regardless of value, while offering incentives only on transactions of up to Rs 2,000 made to small merchants.
In August this year, before the new framework was finalised, the finance ministry said consumers would continue to face no UPI transaction charge and that any future MDR would apply only to a limited category of merchant transactions above a threshold.
The September framework subsequently fixed that threshold at Rs 2,000 and set the standard MDR at 0.4% for specified merchant payments above it.
UPI processed 24.51 billion transactions worth Rs 29.82 lakh crore in August 2026, according to NPCI data.
