For customers, UPI remains free for person-to-person transfers of any amount and for merchant payments up to and including ₹2,000. The Ministry of Finance’s 15 September 2026 explanation also keeps zero MDR for qualifying small P2PM merchants that receive up to ₹1 lakh a month through UPI QR codes.
For specified merchant payments above ₹2,000, MDR is charged inside the merchant payment ecosystem rather than to the customer. The Ministry describes a general 0.4% rate, a ₹5 rate for listed essential sectors, and a 0.02% rate for capital-market-related payments, each with stated conditions and caps.
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The short answer: who pays a UPI fee?
UPI fees depend on whether the transfer is person-to-person (P2P) or person-to-merchant (P2M), the merchant payment amount, the merchant’s category and, for some small businesses, monthly QR receipts.
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- P2M up to ₹2,000: Customer-to-merchant payments up to and including ₹2,000 have zero MDR, so the customer does not pay a UPI transaction charge under the stated framework.
- Qualifying P2PM small merchants: Street vendors and other small merchants receiving up to ₹1 lakh per month through UPI QR codes in the P2PM category continue to receive zero MDR on all transactions.
- Specified P2M payments above ₹2,000: MDR can apply to the merchant-side payment ecosystem. The Ministry says banks should ensure that merchants do not pass this MDR on to customers.
The exact classification of a particular payment depends on the applicable merchant category. A payment above ₹2,000 therefore does not automatically mean that every merchant is charged the general rate.
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Customer charges by payment type
Person-to-person transfers have no amount threshold
When one individual pays another individual through UPI, the Ministry’s September 2026 account says the transfer is free for the sender and recipient, whatever the amount. The ₹2,000 threshold belongs to the specified merchant-payment framework; it is not a limit on free P2P transfers.
This distinction matters for rent, splitting a bill, reimbursing a friend or sending money to a family member. A transfer of ₹500 and a transfer of ₹50,000 are both described as free when they are genuinely P2P transactions. Your bank or app may still impose separate account, card, cash-withdrawal or service charges unrelated to the UPI transaction itself; the Ministry’s statement concerns UPI charges.
Merchant payments up to and including ₹2,000
For a customer paying a merchant, the stated zero-MDR band includes every amount up to ₹2,000. A payment of exactly ₹2,000 is included. The rule is about the merchant-payment framework, not about a daily spending allowance.
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Merchant-side MDR rates in the September 2026 framework
Merchant Discount Rate (MDR) is a fee shared within the payment ecosystem. It can compensate participating banks, payment service providers and UPI application providers for processing a merchant payment. The Ministry expressly says MDR is not a tax and is not a fee collected by the Government or NPCI.
| Payment situation | Stated MDR treatment | Who bears it |
|---|---|---|
| P2P individual-to-individual | No transaction, platform or other UPI charge for either individual, regardless of amount | Neither customer nor recipient |
| P2M up to and including ₹2,000 | Zero MDR | No customer UPI charge; merchant MDR is zero under this band |
| Qualifying P2PM small merchant | Zero MDR on all transactions when the merchant receives up to ₹1 lakh per month through UPI QR codes in the P2PM category | Merchant remains exempt while the stated condition applies |
| Specified P2M above ₹2,000 | General MDR of 0.4%; for transactions of ₹75,000 and above, capped at ₹300 per transaction | Merchant-side payment ecosystem |
| Listed essential or thin-margin sectors above ₹2,000 | Flat ₹5 per transaction; examples include railways, telecommunications, insurance, fuel and agricultural inputs | Merchant-side payment ecosystem |
| Capital-market-related payments | 0.02% MDR, capped at ₹300 per transaction; examples include mutual funds, securities, stockbrokers and dealers | Merchant-side payment ecosystem |
The rates above are the Ministry’s published summary. The complete operational classification list was not included in the material available for this explanation, so a merchant should confirm its assigned category with its acquiring bank or payment provider before calculating settlement costs.
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How to work out a merchant’s possible MDR
Step 1: Identify the payer and payee
Confirm whether the payment is P2P or P2M. A payment to a shop, utility, transport operator, insurer, investment platform or other business is not treated the same way as a transfer to another individual.
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If the P2M amount is ₹2,000 or less, the Ministry describes zero MDR. If it is above ₹2,000, continue to the category checks rather than applying 0.4% automatically.
Step 3: Check the P2PM small-merchant condition
A street vendor or other qualifying small merchant may retain zero MDR on all transactions when monthly receipts through UPI QR codes are up to ₹1 lakh and the merchant is classified in the P2PM category. This is a condition for eligible small merchants, not a ₹1 lakh free allowance that every business can claim.
Step 4: Check for a sector-specific rate
The Ministry lists a flat ₹5 MDR for specified essential or thin-margin sectors above ₹2,000. It gives railways, telecommunications, insurance, fuel and agricultural inputs as examples. It also describes a 0.02% rate, capped at ₹300, for capital-market-related payments such as mutual funds, securities, stockbrokers and dealers.
Step 5: Apply the general rate only when appropriate
For a specified transaction above ₹2,000 that is not covered by the small-merchant or sector-specific treatment, the stated general rate is 0.4%. The Ministry says the charge is capped at ₹300 per transaction when the transaction value is ₹75,000 or more. For example, 0.4% of ₹75,000 is ₹300; the stated cap prevents a higher MDR on larger transactions in that band.
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Worked examples
Example: P2P transfer of ₹10,000
An individual sends ₹10,000 to another individual. Under the Ministry’s September 2026 explanation, neither person pays a UPI transaction, platform or other UPI charge. The ₹2,000 merchant threshold does not apply.
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Example: Customer buys goods for ₹2,000
A customer pays a shop exactly ₹2,000. Because the rule says “up to ₹2,000,” the payment is within the zero-MDR band. The customer should not be charged a separate UPI fee.
Example: Standard specified merchant payment of ₹25,000
If the payment is a specified P2M transaction above ₹2,000 and does not qualify for a small-merchant or sector-specific rate, the stated general MDR is 0.4%. On ₹25,000, that percentage is ₹100. This is an ecosystem charge on the merchant side, not a customer UPI surcharge under the Ministry’s explanation.
Example: Standard specified payment of ₹100,000
At 0.4%, ₹100,000 would produce ₹400 before the cap. Because the transaction is at least ₹75,000, the stated cap limits MDR to ₹300 per transaction.
Example: Essential-sector payment above ₹2,000
A qualifying payment in one of the listed essential or thin-margin sectors is described at a flat ₹5 MDR per transaction above the threshold. The applicable sector classification must be confirmed with the payment provider.
Example: Capital-market payment of ₹50,000
At 0.02%, the stated MDR would be ₹10, subject to the capital-market category and its ₹300 cap. This rate is not the general rule for ordinary retail purchases.
Can a merchant add a “UPI charge” to the bill?
The Ministry says MDR is a merchant-side payment-ecosystem charge and that banks should ensure merchants do not transfer it to customers. UPI application providers are also described as prohibited from platform or hidden fees.
If a merchant displays a higher total for paying by UPI, separate two questions:
- Payment surcharge: An added amount described as a UPI or MDR fee. The Ministry’s current account says MDR should not be passed to the customer.
- Product or service price: A merchant may set prices for goods, delivery, convenience or other services. That is not automatically the same thing as a UPI fee, although the wording and consumer-protection implications depend on the transaction.
The national policy summary does not decide every individual billing dispute. Keep the invoice, the amount shown in the UPI approval screen and any message describing the extra charge, then raise the issue with the merchant and the relevant bank or payment provider.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.MDR is not the same as a tax, GST or a transaction limit
MDR versus tax
MDR is a charge within the merchant payment ecosystem. The Ministry’s wording is explicit: “MDR is a charge within the merchant payment ecosystem. It is not a charge on customers making UPI payments.” It is not a Government or NPCI fee and should not be described as a tax.
What the 2025 GST statement means
An April 2025 Ministry of Finance release said MDR on P2M UPI transactions had been removed effective January 2020 and that no MDR was then being charged. It also said that, under that zero-MDR position, there was consequently no GST applicable to those transactions. That was a statement about the policy then in force.
The September 2026 release describes a later framework with MDR for specified merchant payments above ₹2,000. It does not set out GST treatment for every type of MDR. Do not extend the 2025 “no GST” explanation to the later framework without a current tax source.
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Transaction limits versus charges
Daily or per-transaction UPI limits are separate from fees. The Ministry describes bank and NPCI limits as security and risk-management safeguards, not charging thresholds. Reaching a bank’s limit can cause a payment to fail even when no fee is payable.
What changed between 2025 and 2026?
| Policy reference | What it said | How to use it now |
|---|---|---|
| April 2025 Ministry of Finance release | MDR on P2M UPI transactions had been removed effective January 2020; no MDR was then being charged | Historical context only |
| 15 September 2026 Ministry of Finance explanation | Free P2P; zero MDR for P2M up to ₹2,000; zero MDR for qualifying P2PM small merchants; MDR for specified P2M payments above ₹2,000 with sector rates and caps | Latest policy summary available for this article |
The two statements refer to different policy dates and should not be presented as contradictory rules applying at the same time. The September 2026 explanation says the framework was introduced under the Payment and Settlement Systems Act, 2007 after UPI Steering Committee deliberations.
The exact commencement wording and the complete operational category definitions require the underlying government notification and NPCI circular. Those documents were not available in the source material used here, so merchants making settlement, accounting or contract decisions should verify the current implementation with their acquiring bank or payment provider.
How broad is the impact?
The Ministry of Finance reports that approximately 4% of merchant transactions would be subject to MDR under its analysis, while approximately 96% would remain unaffected because they fall below ₹2,000 or within the small-merchant zero-MDR framework. It also reports that 70% of total UPI transaction value remains outside the MDR framework.
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These are Ministry-reported figures for 2026, not an independent recomputation. They indicate the policy is targeted at a limited set of merchant payments rather than every UPI transaction.
Merchant checklist for settlement and customer communication
- Confirm whether your acquiring provider has classified you as P2M or P2PM.
- Record monthly UPI QR receipts and check whether the stated ₹1 lakh P2PM condition applies.
- Identify whether your business falls into an essential-sector or capital-market category listed in the Ministry explanation.
- For transactions above ₹2,000, obtain the provider’s written MDR rate, cap and settlement calculation.
- Do not add a line item described as a UPI or MDR surcharge to the customer invoice without resolving the applicable rules with your bank and compliance adviser.
- Keep settlement reports that show gross amount, MDR, any other disclosed processing item and the net credit.
Bottom line for customers and merchants
Customers do not pay a UPI transaction fee for P2P transfers, and merchant payments up to ₹2,000 are in the stated zero-MDR band. Qualifying small P2PM merchants can remain at zero MDR on all QR transactions while they meet the ₹1 lakh monthly condition. Above ₹2,000, only specified merchant payments enter the MDR framework, with a 0.4% general rate, a ₹5 essential-sector rate and a 0.02% capital-market rate under the Ministry’s published summary. Those charges belong to the merchant payment ecosystem, not to the customer, and the 2025 zero-MDR statement should be treated as historical rather than current.
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