India’s new UPI MDR, a merchant fee, is being described as the end of free digital payments. It is a narrower change than that, and the biggest winners are the issuing banks. The apps come third. What the fee does create, for the first time, is a reason for large merchants to care which payment provider sits behind their checkout.
From October 15, 2026, a merchant discount rate of 0.4% applies to UPI person-to-merchant payments above ₹2,000. The government’s notification caps the fee at ₹300 for transactions of ₹75,000 and above, sets a flat ₹5 for railways, telecom, insurance, fuel and farm inputs, and charges 0.02% for capital markets. Person-to-person payments stay free, as do small merchants receiving up to ₹1 lakh a month. The government says 96% of merchant transactions are unaffected. Merchants may not pass the fee to customers, and apps may not add platform charges.
Issuers take the largest share of UPI MDR
The split matters more than the headline rate. According to Moneycontrol’s account of NPCI’s circular, the issuing bank receives 40% of the fee, the acquiring bank 30%, the UPI app 20% and the app’s partner bank 10%. On a ₹10,000 payment, that is ₹16, ₹12, ₹8 and ₹4.
NPCI estimates the total pool at ₹13,000 crore to ₹15,000 crore a year. At a 20% share, the apps would split roughly ₹2,600 crore to ₹3,000 crore among them. That is the first direct revenue UPI apps have earned from merchant payments, and it gives them a reason to pursue high-value transactions. It is also well short of a full business model. The government’s FAQ puts the cost of running UPI at about ₹20,000 crore a year, more than the entire fee pool, and 5% of collections goes to a fund for small merchants.
The banks gain most. Issuers receive the largest share for doing what they already do, holding the customer’s account. For banks that have spent years carrying UPI volume at zero merchant fee, the 40% is a correction to old economics. It also strengthens their hand against the apps, which depend on bank partners for every account they serve.
Aggregators have no share, and will price around it
The circular leaves one group out. Payment aggregators, which serve most online merchants, have no prescribed share. ET BFSI reports that they are negotiating for 50% to 80% of the acquirer’s 30%, worth ₹6 to ₹9.60 on a ₹10,000 payment, and are pushing for direct participation as acquirers.
That negotiation is where merchants come in. The 0.4% is fixed, but what an aggregator charges on top of it, or rebates against it, is not. A large merchant processing high-value UPI payments now has a priced service to compare across providers. Routing tools already exist: Juspay’s dynamic routing lets merchants send each payment to the gateway with the best success rate or cost. Until now, UPI routing was mostly about success rates. From October 15, cost enters the calculation for every payment above ₹2,000.
The threshold itself invites behaviour NPCI will watch. A fee that starts at ₹2,000.01 rewards splitting larger bills, and merchants cannot recover the charge from customers directly.
RuPay credit on UPI follows card rules
The FAQ also confirms that credit-linked UPI, chiefly RuPay credit cards used on UPI, follows card pricing rules, so the new 0.4% does not apply. Card fees typically run at 1.5% to 2.5%. That keeps credit on UPI a premium product for merchants, and it means the cheapest high-value UPI payment remains one drawn from a bank account.
Early volume data suggests some sensitivity. UPI processed 24.07 billion transactions worth ₹29.4 lakh crore in September, down 1.8% by volume and 1.5% by value from August, with a second-half dip of 6% against a typical 3% to 5%. NPCI chief executive Dilip Asbe said the change could “create some pain.” The fee had not yet taken effect, so its first real test comes in October.
Bottom line
The 0.4% fee gives UPI apps a revenue line and gives issuing banks a larger one. It does not cover the cost of running the system. Its most practical effect is on routing: merchants with high-value flows now have a cost to manage and a reason to negotiate with aggregators.
Watch for:
- NPCI’s October data, the first full month after October 15, and whether volume above ₹2,000 falls faster than total volume
- A prescribed share for payment aggregators, or direct acquiring licences
- Any NPCI rule on split payments around the ₹2,000 threshold