From free “UPI” to “MDR”… Who will bear the cost of the digital revolution?

Meera Bhayandar, 17 September (City News Mumbai Anant Nalavade)

The picture of digital payments in India has changed rapidly over the past few years. QR codes have reached everything from tea stalls to large malls, and paying with a mobile phone has become a daily habit for ordinary citizens. Now, under this system, from 15 October 2026 selective large merchants will be subject to a Merchant Discount Rate (MDR) on UPI transactions.

According to the new arrangement, a 0.4% MDR will apply to eligible Person‑to‑Merchant (P2M) UPI transactions exceeding ₹2,000. For transactions of ₹75,000 or more, this fee will be capped at a maximum of ₹300 per transaction. Person‑to‑person (P2P) payments will not fall within this fee scope, and eligible P2M payments up to ₹2,000 will also remain outside the MDR.

In certain sectors such as railways, telecommunications, insurance, fuel, and agricultural inputs, a flat MDR of ₹5 has been set for eligible transactions above ₹2,000. For capital‑market transactions linked to mutual funds, securities, stockbrokers, and dealers, a 0.02% MDR with a maximum of ₹300 has been stipulated.

Why is the question now on the merchant rather than the customer?

The central government says the MDR will not be taken directly from the customer. It is a fee that will be distributed among the banks, payment service providers, and UPI app providers involved in the payment system. The government argues that, given the expanding reach of UPI, cyber‑security, technical infrastructure, and future development, it is necessary to make the payment system financially sustainable.

But this is where the real question begins.

When the MDR is to be paid by the merchant and cannot be collected directly from the customer, where will the ultimate economic impact of this additional cost fall? Will merchants absorb it from their profit margins? Will some merchants accept the cost in a competitive market while others try to offset it in other ways? The actual answers will emerge from market behavior after the new regime is implemented.

Thus the issue is not just about 0.4 percent, but about which economic side will bear the cost of digital payments.

‘UPI tax’ or MDR?

It is important to understand a key distinction here. The government and NPCI describe it not as a tax on UPI, but as an MDR on selective merchant transactions. The amount collected as MDR will be distributed among participants in the payment ecosystem.

Opposition parties have raised political questions about the decision. The Congress has labeled it a ‘UPI tax’, criticized the centre, and alleged foreign pressure. The central government, however, has dismissed the foreign‑pressure allegation, stating that policy decisions related to UPI are taken independently by India. Based on publicly available information, the claim of foreign pressure remains a political assertion without any publicly disclosed official evidence.

Benefits and potential concerns—both sides

The declared purpose of the new arrangement is to make the UPI ecosystem financially sustainable. According to the government, the revenue from MDR can support the payment system, security, and technological development. Small transactions and P2P payments have been exempted from the fee.

Conversely, merchant associations and some industry representatives have expressed concern about rising costs. Reuters reports that organizations including the Retailers Association of India fear that the additional cost could affect low‑margin businesses and that some merchants might consider reverting to cash payments.

Conclusion: The question is not just about 0.4 % but also about trust

UPI has transformed payment habits in India. Now that an MDR framework is arriving for large‑merchant transactions, the biggest question for the government will be transparency and policy stability.

How much cost will fall on merchants, how that impact will manifest in the market, and how much of the collected amount will be used for UPI’s infrastructure and security—clear information on these points will be crucial.

**Digital India’s strength lies not only in QR codes but also in the trust people and businesses place in them. In the coming period, more important than the 0.4 % MDR will be how this new regime balances the expansion of digital payments with the cost burden on the merchant class.**