UPI Transaction Fee Framework Implementation
The Ministry of Finance has introduced a new UPI framework that maintains free transactions for the vast majority of users while implementing a Merchant Discount Rate (MDR) on specific high-value merchant transactions. The framework was established under the Payment and Settlement Systems Act, 2007 following detailed deliberations by the UPI Steering Committee.
Free Transaction Categories
All person-to-person (P2P) UPI transactions remain completely free regardless of amount, accounting for 70% of total transaction value. Merchant payments up to ₹2,000 also remain free, as do transactions under the zero-MDR framework for small merchants receiving up to ₹1 lakh per month through UPI QR codes under the P2PM category. This protects street vendors, neighborhood shops, and other small businesses from additional payment costs.
MDR Implementation Structure
A nominal MDR of 0.4% applies only to person-to-merchant transactions above ₹2,000, with transactions of ₹75,000 and above capped at ₹300 per transaction. Essential sectors including railways, telecommunications, insurance, fuel, and agricultural inputs receive special treatment with a flat MDR of ₹5 per transaction for amounts above ₹2,000. Capital market transactions relating to mutual funds, securities, stockbrokers, and dealers attract a reduced MDR of 0.02%, also capped at ₹300 per transaction.
Consumer Protection Measures
The framework explicitly states that MDR is not a tax or government charge but rather distributed among payment ecosystem participants including banks and payment application providers. Customers are protected from bearing MDR costs, with banks advised to ensure merchants do not pass charges to consumers. UPI application providers are prohibited from imposing platform fees or hidden charges, and individuals maintain unlimited free usage without monthly quotas or volume restrictions.
Transaction Impact Analysis
Data analysis indicates MDR will affect only approximately 4% of merchant transactions, meaning 96% of merchant transactions remain unaffected due to either being below the ₹2,000 threshold or covered by the zero-MDR framework for small merchants. Daily transaction limits ranging from ₹1 lakh to ₹5 lakh are maintained as security and risk-management safeguards, not charging thresholds.
Small Merchant Support Program
A dedicated fund will be established using 5% of total MDR collections to promote UPI adoption among small merchants. This fund will support wider UPI acceptance, sustained usage, and the inclusion of small businesses in India's digital payments ecosystem. The framework aims to strengthen UPI's long-term sustainability while keeping payments free for individuals and protecting small merchants, consistent with the recommendation of the Standing Committee on Finance in its 32nd Report.