For nine years UPI has been free at both ends. That changed with NPCI's circular of 15 September 2026, which introduces a merchant discount rate on person-to-merchant payments from 15 October 2026. The guide on this page walks through the framework rule by rule — the 0.4% rate, the ₹2,000 threshold, the ₹300 cap, the flat ₹5 for essential sectors, the P2PM small-merchant exemption, GST and input credit, and the ban on surcharging — with worked examples for common Indian businesses. The UPI MDR calculator turns the rules into your own monthly number.
Why MDR, and why now
Card networks have always charged merchants 1–2%; UPI ran at zero MDR since 2020 under a government mandate, with banks and PSPs compensated by an incentive scheme that shrank each year. With UPI now carrying over 20 billion transactions a month, the industry argued the zero-fee model was unsustainable for infrastructure. The 2026 framework keeps small transactions and small merchants free, and prices large-ticket P2M payments below card rates. The political and legal reaction — a Supreme Court petition, trader associations' cash-only posters, petrol pump threats — is covered in UPI MDR starts 15 October.
The framework, category by category
| Category | Rule |
|---|---|
| Person-to-person (P2P) | Free, unchanged |
| P2PM small merchants — UPI QR receipts up to ₹1 lakh per month | Nil MDR on every transaction, any amount |
| P2M merchants — transaction up to ₹2,000 | Nil |
| P2M merchants — transaction above ₹2,000 | 0.4% of the full amount, capped at ₹300 |
| Essential sectors: fuel, railways, telecom — above ₹2,000 | Flat ₹5 per transaction |
| Government payments, education fees, utilities | Treated per PSP category tagging; most utility bills fall under standard P2M rules |
| GST | 18% on the MDR, invoiced by the PSP; ITC available |
Merchant classification is done by your PSP or acquiring bank on the basis of monthly UPI QR receipts, reviewed periodically. Crossing ₹1 lakh moves you to P2M; falling below can move you back.
What merchants cannot do
- Surcharge: no "extra 0.4% for UPI" — the circular prohibits passing MDR to customers, mirroring the RBI's stance on card surcharges.
- Refuse UPI selectively above ₹2,000 while advertising UPI acceptance — the Finance Ministry has warned of action for discriminatory refusal.
- Split bills to keep each below ₹2,000 to avoid MDR — PSPs monitor patterns and can re-tag merchants.
What it means by business type
- Kirana, chai stall, salon, tailor: below ₹1 lakh a month or below ₹2,000 a bill → unaffected. Keep the UPI QR standee up.
- Boutiques, electronics, furniture, jewellers: 0.4% on large bills, capped at ₹300; typically 0.3–0.5% of UPI sales after ITC. Still cheaper than cards and than the 1–1.5% real cost of handling cash.
- Petrol pumps, telecom recharges, railway bookings: flat ₹5 above ₹2,000 — cheaper than the earlier card arrangements.
- Freelancers and services: payments to a personal VPA are P2P and free; merchant QRs and payment links are P2M. Large invoices may move to NEFT; put bank details on the GST invoice.
- Restaurants: most bills are below ₹2,000; large party bills carry 0.4%.
Accounting and GST
MDR is deducted from settlements, so bank credits will be slightly less than sales. Record gross sales from your invoices, book the MDR as a bank-charge expense from the PSP's monthly invoice, and claim the 18% GST on it as ITC — which needs your GSTIN on the PSP account. Payment receipts should show the amount the customer paid, not the net settlement; use the payment receipt tool with the dynamic QR. The effect on margins is easiest to see in the profit margin calculator.
Preparation checklist
- Ask your PSP for your category tag in writing.
- Add your GSTIN to every PSP and payment-gateway account.
- Recheck pricing on items above ₹2,000; adjust the price list rather than adding a fee.
- Brief counter staff: no surcharge, no refusals, no splitting.
- Reconcile the first settlement statement after 15 October against invoices.
The shop-floor version of this checklist is in UPI MDR is here: how to prepare your shop, and the wider 2026 UPI changes — limits, UPI Circle, Lite — in UPI in 2026.
Related tools
- UPI MDR calculator — your monthly fee by category and volume.
- UPI QR standee — counter QR for any amount.
- Payment receipt — bill-specific QR and receipt.
- GST invoice — invoices with bank details for large payments.
- Profit margin calculator — pricing with payment costs included.