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This is not a charge on every UPI transfer. Person-to-person (P2P) payments remain free, qualifying small P2PM merchants remain zero-MDR, and some sectors have separate rates. The account’s classification, merchant category and payment type determine which rule applies.
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What changes on 15 October 2026?
The DFS FAQ published on 15 September 2026 describes a threshold-based framework scheduled to take effect on 15 October 2026. As of 13 October 2026, that date is still forthcoming, so merchants should treat the rates below as announced rules rather than fees already effective at the time of writing.
The framework concerns selected UPI person-to-merchant (P2M) transactions. It does not turn ordinary UPI into a universally paid service. The DFS FAQ continues to describe person-to-person transfers as free and says transactions up to ₹2,000 have no MDR, including for established commercial entities.
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DFS says more than 95% of total UPI P2M transaction volume is up to ₹2,000. A separate 15 September 2026 DFS release uses the headline “UPI Continues to Remain Free for Peer to Peer Transactions and 96% of Merchant Transactions.” That headline does not, by itself, explain the denominator or calculation, so the detailed thresholds in the FAQ are the safer basis for a merchant’s invoice planning.
Who pays UPI MDR?
The acquiring bank is the merchant’s UPI acceptance partner. Under the announced framework, MDR is paid by the merchant to that acquiring bank. The DFS FAQ states: “Merchants on-boarded cannot pass on MDR charges to customers while accepting payments through UPI.” A shop should therefore not add a separate “UPI fee,” reduce the customer’s change, or display a surcharge solely to recover this MDR.
The customer’s payment amount remains the amount shown at checkout. The merchant’s settlement statement may show the applicable MDR deduction or debit under its agreement with the acquirer. Ask the acquirer how the deduction will appear and when the net amount will settle.
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For a covered standard P2M transaction above ₹2,000, the announced MDR is 0.4%. For transactions of ₹75,000 and above, the fee is capped at ₹300 per transaction. The cap means the percentage calculation stops increasing once it reaches ₹300.
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| Transaction amount | Announced rule | MDR calculation | MDR payable by merchant |
|---|---|---|---|
| ₹2,000 or less | No MDR under the FAQ’s general threshold treatment | 0.4% does not apply | ₹0 |
| ₹3,000 | Covered P2M above ₹2,000 | 0.4% × ₹3,000 | ₹12 |
| ₹50,000 | Covered P2M below the cap threshold | 0.4% × ₹50,000 | ₹200 |
| ₹75,000 | Cap begins at this amount | 0.4% would equal ₹300 | ₹300 |
| ₹1,00,000 | Covered P2M at or above the cap threshold | 0.4% would exceed the cap | ₹300 |
These examples follow the figures in the DFS FAQ. They describe the MDR itself, not any separate onboarding, device, software, settlement or support charge that a provider may include in a commercial contract.
Is UPI free for merchants?
The accurate answer depends on the merchant’s classification and the transaction. A merchant can still have zero MDR in several common situations:
- A P2P transfer, because the payer and beneficiary are individuals rather than a merchant acceptance transaction.
- A payment of ₹2,000 or less under the FAQ’s general P2M threshold treatment.
- A qualifying P2PM small merchant account receiving up to ₹1 lakh per month in inward UPI credits directly into the account.
- A payment type or sector covered by a separate rule whose rate is zero for that transaction.
“Free” refers to MDR in these statements. It does not promise that every acquiring arrangement has no commercial cost. A provider may price a QR setup, soundbox, terminal, payment-aggregator service, software integration, support plan or settlement service separately. The DFS schedule does not set those prices.
How the P2PM small-merchant exemption works
The FAQ describes a P2PM tier for small vendors receiving up to ₹1 lakh per month through UPI QR directly into their accounts. Those qualifying P2PM vendors are described as zero-MDR. Importantly, one payment above ₹2,000 does not automatically remove the exemption if the account remains in the exempt P2PM tier.
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The FAQ also says that a merchant whose monthly inward UPI credits exceed ₹1 lakh for three consecutive months transitions to P2M classification. That is an account-level classification rule, not a conclusion that can be drawn from one high-value sale. The acquirer’s records and the merchant’s category determine the operational status.
What a small merchant should confirm
- Ask the acquiring bank or payment provider whether the account is currently classified as P2PM or P2M.
- Confirm which inward-credit period the provider uses to test the ₹1 lakh monthly threshold.
- Ask how a three-month exceedance changes the account, settlement statement and applicable MDR.
- Get written confirmation of the merchant category code (MCC) and any sector-specific classification.
Do not assume that a street stall, home business or small shop is exempt merely because an individual payment is small. Conversely, do not assume that a single payment over ₹2,000 creates MDR when the account is still within the P2PM exemption.
Special sector and capital-market rates
The standard 0.4% schedule is not the only rate in the FAQ. Certain named sectors—including railways, telecom, insurance and fuel—are described as using a flat ₹5 MDR on transactions above ₹2,000. Capital-market transactions are listed at 0.02%, with a ₹300 cap. These are category rules, so the applicable rate follows the merchant’s approved classification and transaction purpose.
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|---|---|---|
| Standard covered P2M | 0.4% | Above ₹2,000; capped at ₹300 from ₹75,000 per transaction |
| Railways, telecom, insurance and fuel | Flat ₹5 | On transactions above ₹2,000 |
| Capital-market transactions | 0.02% | Capped at ₹300 |
The list is not a license for a merchant to self-select a cheaper rate. Request the MCC and category treatment from the acquiring bank, and ask how the provider identifies a capital-market or other special transaction.
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Direct-account UPI versus credit-linked UPI
The fee schedule above concerns the direct account-to-account treatment described in the FAQ. Credit-linked UPI—including RuPay credit cards linked to UPI and bank credit lines—is governed by separate credit-product rules rather than automatically using the direct-account schedule. A merchant accepting both methods should ask the acquirer to show each method’s rate, settlement timing and contractual terms separately.
Do not calculate a credit-linked payment’s fee by applying 0.4% merely because the QR code is the same. The funding source and product classification matter.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Merchant acceptance options and settlement
NPCI’s merchant FAQ says a merchant enables UPI by partnering with an acquiring bank. It identifies QR, intent, application-based and collect modes. The acquirer supplies the UPI infrastructure and, during onboarding, provides the merchant category code.
QR acceptance
A static or dynamic QR lets a customer scan and authorize payment in a UPI app. The QR must be the merchant’s approved credential from the acquirer. NPCI lists QR as an acceptance mode, and the DFS FAQ says existing QR stands continue to work under the described framework. A physical countertop holder or QR standee can make the approved code easier to see, but it is only a display accessory: it is not a UPI account, payment terminal or connection by itself.
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Intent, app and collect flows
Intent can hand a customer from a merchant app or website to a UPI app with payment details. Application-based acceptance embeds UPI in a merchant application, while collect requests ask the customer to approve a request in the UPI app. These choices affect integration work and the provider contract, not the customer’s right to be charged an MDR surcharge.
Settlement timing
NPCI describes merchant settlement as immediate after the customer confirms payment into a merchant pool or bank account, subject to the merchant’s agreement. “Immediate” therefore does not replace the need to read the settlement clause: the contract controls account destination, reconciliation, cut-off handling and any service fees.
Costs outside MDR that a merchant must price
The announced DFS framework does not establish a universal price for the rest of a UPI setup. Before signing, request an itemized written quote covering:
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- One-time onboarding or verification charges.
- QR printing, replacement or display equipment.
- Soundbox, terminal or other hardware rental and maintenance.
- Payment-aggregator, gateway or software-integration fees.
- Settlement, reconciliation, reporting and support charges.
- Taxes or other statutory amounts shown on the provider’s invoice.
Ask whether each amount is one-time, monthly, per transaction or conditional. Also ask whether the quoted MDR includes or excludes taxes and whether rates differ by payment method. The DFS announcement governs the covered MDR category; it does not substitute for the merchant-acquirer agreement.
A practical checklist before 15 October 2026
- Identify the account: record the legal business name, current MCC and whether the provider labels it P2PM or P2M.
- Map transaction types: separate ordinary debit-from-bank UPI, credit-linked UPI, refunds and any industry-specific flows in your sales system.
- Model the threshold: estimate how many payments exceed ₹2,000 and whether monthly inward credits could exceed ₹1 lakh for three consecutive months.
- Request the rate card: obtain the 0.4% rule, ₹300 cap treatment, any ₹5 or 0.02% category rate and the provider’s effective date in writing.
- Check customer-facing language: remove any sign or checkout message that adds an MDR surcharge to UPI payments.
- Reconcile after launch: compare gross payment, MDR, taxes and net settlement on the first statements after the scheduled start date.
- Escalate discrepancies: send the transaction ID, amount, date, MCC and statement line to the acquirer and request a written explanation.
Why older articles say UPI is free
Older summaries often refer to the policy effective 1 January 2020, under which no charge including MDR was payable on payments using RuPay debit cards and BHIM-UPI. DFS annual-report material also describes later incentive schemes for RuPay debit-card and low-value BHIM-UPI P2M transactions. That historical policy explains the long-standing “UPI is free” shorthand.
The September 2026 FAQ introduces a later, prospective and threshold-based framework for selected P2M payments. Both statements can be accurate when dated: the 2020 policy describes its period, while the announced 15 October 2026 schedule describes the future treatment set out in the current FAQ.
Bottom line for a merchant
Plan for the announced 15 October 2026 change, but classify your account before calculating liability. A covered standard P2M payment above ₹2,000 is scheduled to carry 0.4% MDR, capped at ₹300 from ₹75,000; the merchant pays the acquirer and cannot pass that MDR to the customer. P2P remains free, qualifying P2PM small merchants are described as zero-MDR, and railways, telecom, insurance, fuel, capital-market and credit-linked transactions follow distinct rules. Your acquirer’s written MCC, account classification and itemized contract are the documents that determine how those rules apply in practice.
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