Starting October 15, India will implement a 0.4% MDR on UPI person-to-merchant transactions above ₹2,000, capped at ₹300 for high-value payments. This change is expected to bring more merchants into the MDR net, affecting digital payment costs across sectors.
- MDR of 0.4% applies on UPI P2M transactions above ₹2,000 from October 15.
- Merchants with monthly receipts under ₹1 lakh are exempt, others face fees.
- Banks and third-party apps share MDR revenue, with potential ₹22,000 Cr annual pool by FY28.
What happened
India’s National Payments Corporation has introduced a new MDR framework that takes effect on October 15, charging a 0.4% fee on UPI person-to-merchant transactions over ₹2,000. The fee is capped at ₹300 for transactions exceeding ₹75,000. Merchants that collect up to ₹1 lakh monthly via UPI QR codes remain exempt, but those crossing this threshold for three consecutive months will be moved to the standard MDR category.
This change significantly expands the number of small and mid-sized merchants required to pay MDR. The fee distribution splits with 0.28% going to the issuing bank as an interchange fee, which then allocates portions to the payer’s PSP bank and TPAPs like Paytm, PhonePe, and Google Pay. For example, on a ₹2,500 purchase, the ₹10 MDR is divided as ₹7 to the issuing bank and ₹3 to the acquiring bank, with the issuing bank passing on some fees to PSP banks and TPAPs.
Why it matters
This MDR introduction alters the economics of India’s largest digital payment platform, UPI, which has been a low-cost option for merchants. Small retailers and businesses operating on narrow margins express concern that the fees will deter digital payment adoption, particularly as the festive season approaches when transaction values typically increase.
Industry groups like the Retailers Association of India argue that the government, which benefits from GST on digital transactions, should cover these costs rather than merchants. The MDR may incentivize merchants to prefer cash payments if digital payment fees affect profitability. The rise in MDR also impacts startups and ecommerce companies reliant on digital payments, forcing them to reconsider discount and cashback structures that previously drove consumer adoption.
What to watch next
Stakeholders will likely monitor how the MDR affects payment behaviors among small and medium merchants, particularly during peak sales periods. The Retailers Association of India plans to engage NPCI and the finance ministry to lobby for a graded MDR structure and incentives to keep small retailers in the formal digital payments ecosystem.
Additionally, the response from fintech players and larger merchants will be pivotal. Providers like PhonePe and Paytm may adjust their business models or pricing strategies to mitigate the MDR’s impact. Over the medium term, the MDR could generate a substantial revenue pool for banks and payment providers while reshaping the competitive landscape of India’s UPI ecosystem.