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A new UPI framework applies a Merchant Discount Rate only to specified person-to-merchant transactions above Rs 2,000; all person-to-person UPI transactions stay free irrespective of amount.
The Ministry of Finance says about 96% of merchant transactions remain unaffected, because they are either below Rs 2,000 or covered by the zero-MDR framework for small merchants.
The headline rate is 0.4% on P2M transactions above Rs 2,000, capped at Rs 300 for transactions of Rs 75,000 and above; essential thin-margin sectors pay a flat Rs 5 and capital market payments 0.02%.
MDR is neither a tax nor a charge collected by the Government or NPCI — it is shared among banks, payment service providers and UPI app providers.
The framework was introduced under the Payment and Settlement Systems Act, 2007 after deliberations by the UPI Steering Committee, and 5% of MDR collections will fund UPI adoption among small merchants.
| Transaction type | MDR | Cap |
|---|---|---|
| Person-to-person (P2P), any amount | Nil | Not applicable |
| Person-to-merchant (P2M) up to Rs 2,000 | Nil | Not applicable |
| Small merchants under P2PM (up to Rs 1 lakh/month via QR) | Nil | Not applicable |
| P2M above Rs 2,000 | 0.4% | Rs 300 for transactions of Rs 75,000 and above |
| Essential/thin-margin sectors above Rs 2,000 — railways, telecom, insurance, fuel, agricultural inputs | Flat Rs 5 per transaction | Flat charge |
| Capital market — mutual funds, securities, stockbrokers and dealers | 0.02% | Rs 300 per transaction |
MDR is the fee borne within the merchant side of a digital payment and shared among the participants that move the money — the merchant's bank, the customer's bank, the payment service provider and the app. It is not a government levy, and the customer does not pay it.
Simple Analogy: A shop's card-machine rental, paid by the shop, not by the shopper.
Instant inter-bank retail payments through a single mobile application using a virtual payment address
Key: Pilot launched on 11 April 2016 by RBI Governor Raghuram Rajan in Mumbai, with 21 member banks on NPCI's platform
Remove the cost of accepting digital payments to push merchant adoption
Key: Section 10A of the Payment and Settlement Systems Act, 2007, inserted by the Finance Act, barred banks and system providers from charging the payer or beneficiary from 1 January 2020 on the prescribed modes — UPI and RuPay debit cards, specified under Section 269SU of the Income-tax Act read with Rule 119AA
An on-device wallet for low-value payments that does not need a UPI PIN each time
Key: Introduced in September 2022; the per-transaction limit was later raised to Rs 1,000 and the wallet balance limit to Rs 5,000
A domestic, open and multilateral card payment network
Key: Launched by NPCI in 2012; together with UPI it was one of the two modes on which zero-MDR was made statutory from January 2020
A central bank digital currency issued by the RBI as legal tender in digital form
Key: The retail pilot (e-Rupee-Retail) began on 1 December 2022 in a closed user group with four banks — SBI, ICICI Bank, YES Bank and IDFC First Bank — and later widened; unlike UPI it is a claim on the central bank, not a transfer between bank deposits
The umbrella organisation for retail payments and settlement systems in India; operates UPI, RuPay, IMPS, NACH and other systems. Incorporated in December 2008 as a not-for-profit company — Section 25 of the Companies Act, 1956, now Section 8 of the Companies Act, 2013 — as an initiative of the RBI and the Indian Banks' Association under the Payment and Settlement Systems Act, 2007, with ten core promoter banks.
The regulator and supervisor of payment systems under the Payment and Settlement Systems Act, 2007; authorises system providers and issues the Digital Rupee. The framework's rates were settled after deliberations by the UPI Steering Committee.
The statute under which payment systems in India are authorised and regulated, and under which this framework has been introduced. NPCI itself was set up as an initiative under this Act.
Inserted by the Finance Act, it provides that no bank or system provider shall impose a charge on the payer or the beneficiary for payment through the prescribed electronic modes. The new framework keeps the customer outside MDR: banks have been advised that merchants must not pass it on, and app providers are expressly prohibited from platform fees or hidden charges.
The P2PM carve-out for QR receipts up to Rs 1 lakh a month and the fund built from 5% of MDR collections both direct the framework's benefit at street vendors and neighbourhood shops — the same constituency PM SVANidhi and Jan Dhan accounts target.
UPI moves money between bank deposits; the e-Rupee is itself central bank money. A favourite comparison question, and this framework sharpens it by putting a charge on part of the UPI merchant stream.
The stated purpose is long-term sustainability — revenue from larger merchant transactions funding infrastructure expansion in rural and semi-urban areas, while individuals and small merchants stay free.
General Awareness > Banking and Financial Awareness > Payment Systems
GS Paper 3 > Indian Economy > Banking, Financial Inclusion and Digital Payments
General Awareness > Economy > Digital India and Payments
Which of the following is a most likely consequence of implementing the 'Unified Payments Interface (UPI)'?
Answer: Mobile wallets will not be necessary for online payments.
Which one of the following best describes the term "Merchant Discount Rate" sometimes seen in news?
Answer: The charge to a merchant by a bank for accepting payments from his customers through the bank's debit cards.
Consider the following statements: 1. National Payments Corporation of India (NPCI) helps in promoting the financial inclusion in the country. 2. NPCI has launched RuPay, a card payment scheme. Which of the statements given above is/are correct?
Answer: Both 1 and 2
With reference to digital payments, consider the following statements: 1. BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account. 2. While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of authentication. Which of the statements given above is/are correct?
Answer: 1 only
Consider the following statements in respect of the digital rupee: 1. It is a sovereign currency issued by the Reserve Bank of India (RBI)... 2. It appears as a liability on the RBI's balance sheet. 3. It is insured against inflation by its very design. 4. It is freely convertible against commercial bank money and cash. Which of the statements given above are correct?
Answer: 1, 2 and 4
The fee within the merchant side of a digital payment, shared among banks, payment service providers and app providers.
The person-to-person-merchant category for small merchants receiving up to Rs 1 lakh a month via UPI QR codes, which keeps zero MDR.
The regime from 1 January 2020 under Section 10A of the PSS Act, 2007 barring charges on the payer or beneficiary for UPI and RuPay debit payments.
The body whose deliberations settled the applicable rates, operational arrangements and consumer safeguards in this framework.