By Lakshmi Jyothish
New Delhi: The Indian government has barred banks and payment system providers from imposing direct or indirect charges on UPI transactions of up to ₹2,000. This new rule has payments made through RuPay-powered debit cards introduced under a new Merchant Discount Rate (MDR) framework for higher-value merchant payments.
The Finance Ministry notified the protection on September 14 under the Payment and Settlement Systems Act, 2007 that no bank or payment system provider can charge a person making or receiving a UPI payment of up to ₹2,000. RuPay-powered debit-card transactions have also been included among the protected payment modes.
The latest framework also clarifies that person-to-person UPI transactions will remain free irrespective of the amount transferred. Payments made to merchants up to ₹2,000 will also remain free of MDR. According to the Finance Ministry, around 96% of person-to-merchant UPI transactions will remain unaffected by the new framework.
The major change will only affect certain person-to-merchant payments above ₹2,000.
From October 15, an MDR of 0.4% will apply to specified merchant transactions above the threshold, with a maximum charge of ₹300 for transactions of ₹75,000 or more.
Essential sectors such as railways, telecommunications, insurance, fuel and agricultural inputs will instead face a flat ₹5 MDR on eligible transactions above ₹2,000.
MDR is a payment-processing fee paid within the digital payment ecosystem. It is not a tax collected by the government or the National Payments Corporation of India (NPCI), but a fee distributed among participants such as banks, payment service providers and UPI application providers.
For ordinary UPI users, the immediate impact is limited. A person sending money to another individual through UPI will continue to pay no transaction charge, regardless of the amount. A customer paying a merchant ₹2,000 or less through UPI will also continue to make the payment without an MDR-related charge.
Small merchants are also protected under the new framework. Merchants classified under the small-merchant category and receiving up to ₹1 lakh a month through UPI QR codes will continue to have zero MDR on their transactions.
The impact is more relevant for larger merchants accepting high-value UPI payments. They may have to absorb the MDR on eligible transactions above ₹2,000 from October 15. The government has said that customers will not directly pay MDR, although businesses could factor payment-processing costs into their pricing or other commercial decisions.
This framework is aimed at supporting the long-term sustainability of the UPI ecosystem, including investment in infrastructure, cybersecurity, innovation and customer services, all the while protecting small-value payments and small merchants from additional costs.
The change follows an amendment to the Payment and Settlement Systems Act that removed the earlier restriction on imposing MDR on notified electronic payment modes. The government subsequently set the ₹2,000 threshold and the new MDR framework.
The notable change is that UPI remains free for payments up to ₹2,000 and through person-to-person transfers. However, businesses accepting eligible UPI payments above ₹2,000 will face new payment-processing costs from October 15. The new rules therefore create a distinction between everyday, low-value digital payments and larger merchant transactions.