India Introduces Merchant Discount Rate for High Value UPI Transactions

The National Payments Corporation of India (NPCI) has introduced a Merchant Discount Rate (MDR) of 0.4% on person to merchant UPI transactions that exceed 2,000 rupees. This follows a September 14 notification from the Finance Ministry under the Payment and Settlement Systems Act, which established a threshold for fee free payments. Under the new framework, person to person transactions remain free regardless of value, and transactions up to 2,000 rupees on UPI and RuPay debit cards are protected from charges. For high value transactions of 75,000 rupees and above, the MDR is capped at 300 rupees per transaction.

Specific rules apply to different sectors. Essential services such as railways, telecom, insurance, and fuel will pay a flat MDR of 5 rupees per transaction above 2,000 rupees. Payments to mutual funds, securities, and stock brokers will attract a lower MDR of 0.02%, also capped at 300 rupees. Small merchants receiving up to 1 lakh rupees per month via UPI QR codes under the Person to Person Merchant classification are exempt from MDR on all transactions. The government stated that only 4% of merchant transactions will be impacted by these changes.

The government and NPCI stated that the framework aims to make UPI self sustainable and provide incentives for expansion in rural areas. A dedicated fund for promoting UPI use among small merchants will be created using 5% of the MDR collections. Banks have been advised to ensure that merchants do not pass these costs on to consumers. However, opposition leaders have challenged this, alleging that merchants may increase prices to recover the fees and claiming the move responds to pressure from American payment companies.