NPCI defers 0.4% UPI merchant fee, due on 15 October, until after Diwali
In one line: NPCI has postponed a 0.4% merchant fee on larger UPI payments, which was to begin on 15 October 2026, to a date after Diwali, without changing its design.
Published 14 October 2026. Written by Pratidin from the reports linked at the end; every fact checked by a separate review before publishing. How we work
The National Payments Corporation of India (NPCI) said on 13 October 2026 that the merchant discount rate (MDR) on select Unified Payments Interface (UPI) payments, due to start on 15 October, will instead be "implemented post-Diwali immediately on a date to be notified separately". The decision was taken by the UPI and Services Steering Committee, with the festive season cited as the reason. MDR is the fee a merchant's bank and the payment system charge the merchant for accepting a digital payment. Customers are not charged directly, and person-to-person (P2P) transfers stay free whatever the amount. Traders' bodies had objected to the new costs.
Under the framework announced for 15 October, a 0.4% MDR applies to eligible person-to-merchant (P2M) UPI payments above ₹2,000, with the charge capped at ₹300. Merchant payments of ₹2,000 or less stay at zero MDR. A flat ₹5 per transaction applies to specified essential-sector payments above ₹2,000, such as railways, telecom, insurance and fuel. Small merchants receiving up to ₹1 lakh a month through UPI stay at zero MDR. The deferral changes only the start date, not these terms.
The fee marks a shift from the zero-MDR regime in force since 1 January 2020. Section 10A of the Payment and Settlement Systems Act, 2007, inserted by the Finance (No. 2) Act, 2019, barred banks and system providers from charging MDR on prescribed electronic modes, including BHIM-UPI and RuPay debit cards. Since then, the government has reimbursed banks through budgetary incentives. The question is who should bear the cost of running and expanding the system. RBI Governor Sanjay Malhotra has said a "small fee" would not have a "major impact" on UPI volumes. Traders' groups argue that the fee adds to their costs. Though customers are not charged directly, merchants may pass the cost on through prices.
Prelims facts
- On 13 October 2026, NPCI's UPI and Services Steering Committee deferred the UPI merchant discount rate, due from 15 October, to a date after Diwali.
- The framework sets a 0.4% MDR on eligible P2M UPI payments above ₹2,000, capped at ₹300; payments up to ₹2,000 and P2P transfers stay free.
- Small merchants receiving up to ₹1 lakh a month through UPI remain at zero MDR; specified essential-sector payments above ₹2,000 attract a flat ₹5.
- Zero MDR on UPI and RuPay debit cards has applied since 1 January 2020 under Section 10A of the Payment and Settlement Systems Act, 2007.
- NPCI, which operates UPI, was incorporated in December 2008 as a not-for-profit company, a joint initiative of the RBI and the Indian Banks' Association.
Quick recall
- Original start date of the UPI MDR?
- 15 October 2026; deferred on 13 October to a date after Diwali.
- Which NPCI body took the deferral decision?
- The UPI and Services Steering Committee.
- MDR rate on eligible P2M UPI payments above ₹2,000?
- 0.4%, capped at ₹300.
- Flat fee on specified essential-sector UPI payments above ₹2,000?
- ₹5 per transaction.
- Monthly UPI receipts up to which a small merchant stays at zero MDR?
- ₹1 lakh.
- Since when has UPI been at zero MDR?
- 1 January 2020.
- Which section of the Payment and Settlement Systems Act, 2007 bars MDR on prescribed modes?
- Section 10A, inserted by the Finance (No. 2) Act, 2019.
- When was NPCI incorporated, and by whose initiative?
- December 2008; a joint initiative of the RBI and the Indian Banks' Association.
Prelims practice question
With reference to the UPI merchant discount rate (MDR) framework of 2026, consider the following statements:
1. MDR is charged to the customer making the payment.
2. Person-to-person UPI transfers are exempt from MDR.
3. Merchant payments of ₹2,000 or less attract zero MDR.
How many of the statements given above are correct?
- Only one
- Only two
- All three
- None
Show answer
Answer: (b) Only two. Statement 1 is wrong: MDR is charged to the merchant, not added to the customer's payment. Statements 2 and 3 are correct: P2P transfers stay free, and merchant payments up to ₹2,000 remain at zero MDR.
Use this in UPSC Mains: previous-year questions
Recurring theme: Digital payments, UPI and financial inclusion
- How to use this
Use the UPI MDR design to show how a market-based payment system can be priced to protect inclusion of small users.
- UPI has been at zero MDR since 1 January 2020 under Section 10A of the Payment and Settlement Systems Act, 2007.
- The 2026 framework charges 0.4% only on eligible merchant payments above ₹2,000, capped at ₹300.
- Small merchants receiving up to ₹1 lakh a month and all person-to-person transfers stay free.
Both UPI and the digital rupee are parts of India's digital payments architecture.
Explains why UPI spread so fast: it moves money directly between bank accounts, which is the system now facing a merchant fee.
Mains practice question
Should UPI remain free for merchants? Discuss the case for and against reintroducing a merchant discount rate on UPI payments. (150 words)
Model answer
The merchant discount rate (MDR) is the fee a merchant pays for accepting digital payments. UPI has been at zero MDR since 1 January 2020; a 0.4% fee on larger merchant payments, due on 15 October 2026, has now been deferred until after Diwali.
Case for an MDR
- Running the system has costs; under zero MDR, the government reimburses banks.
- It is targeted: small payments, P2P transfers and small merchants stay free; the fee is capped at ₹300.
- The RBI Governor has said a small fee would not have a major impact on volumes.
Case against
- Traders say it adds to their costs.
- Merchants may pass the cost on through prices, so customers could pay indirectly.
Way forward
- Phase in the fee with clear notice, as the deferral allows.
A calibrated MDR can fund the system while protecting small users.
The basics
Why this matters
UPI is the backbone of India's digital payments, and its cost model is a live policy question. For six years merchants have paid nothing to accept UPI. The planned merchant discount rate, now pushed to after Diwali, changes that for larger payments. Aspirants should know what MDR is, who runs UPI, what the law says, and how the new fee is designed.
What a merchant discount rate pays for
When a customer pays a shop digitally, several parties do work: the customer's bank, the merchant's bank (the acquirer), the app or payment service provider, and the network. The Merchant discount rate is the fee charged to the merchant to pay for this chain. Under zero MDR, that cost is met through government incentives instead.
- 1Customer's bankDebits the payer's account
- 2Merchant's bank (acquirer)Credits the merchant and onboards it to UPI
- 3Payment app or service providerProvides the interface used to pay or collect
- 4NPCIRuns the UPI network that connects the banks
How the new fee is designed
- All person-to-person transfers
- Merchant payments of ₹2,000 or less
- Small merchants receiving up to ₹1 lakh a month via UPI
- Eligible merchant payments above ₹2,000: 0.4%, capped at ₹300
- Specified essential-sector payments above ₹2,000: flat ₹5
How we got here
- December 2008NPCI incorporated as a not-for-profit company
- 1 January 2020Zero MDR on UPI and RuPay debit cards takes effect
- 15 October 2026Original start date for the 0.4% MDR
- 13 October 2026NPCI defers the fee to a date after Diwali
The legal basis of zero MDR is in Payment and Settlement Systems Act, 2007, and the operator is described in National Payments Corporation of India.
Go deeper
Why it matters for UPSC
Digital payments and financial inclusion are regular GS3 themes, and Prelims has asked about UPI directly. The fee debate raises a core public-policy question: who pays for digital public infrastructure that users treat as free?
The core idea
The Merchant discount rate is charged to merchants for accepting digital payments. Since 2020, a provision of the Payment and Settlement Systems Act, 2007 has kept it at zero for UPI, and the government has reimbursed banks. The new framework, run by the National Payments Corporation of India, brings back a fee only for larger merchant payments, with exemptions for small merchants and person-to-person transfers. The Unified Payments Interface itself stays free for customers.
Numbers and dates to remember
- 0.4%: MDR on eligible P2M payments above ₹2,000; cap ₹300.
- ₹5: flat fee on specified essential-sector payments above ₹2,000.
- ₹1 lakh a month: small-merchant threshold for zero MDR.
- 1 January 2020: zero MDR begins.
- 15 October 2026: original start date; 13 October 2026: deferral announced.
Where to go next
- Merchant discount rate: what the fee is and who pays it.
- Payment and Settlement Systems Act, 2007: the law behind zero MDR.
- National Payments Corporation of India: the body that runs UPI.
- Unified Payments Interface: how UPI works and why it spread.
Go deeper: free payments, but who pays?
The case for a fee rests on cost. Every UPI payment uses the services of banks, app providers and the network. Under zero MDR, these costs are met through budgetary incentives from the government, so taxpayers rather than users fund the system. A Merchant discount rate shifts part of the cost to larger merchants who gain from digital sales. The framework is narrowly drawn: person-to-person transfers, payments up to ₹2,000 and small merchants receiving up to ₹1 lakh a month stay free, and a single payment cannot attract more than ₹300. RBI Governor Sanjay Malhotra has said a "small fee" would not have a "major impact" on volumes.
The case against is about behaviour and timing. Traders' bodies say the fee adds to their costs. Merchants may pass it on through prices, so customers could pay indirectly. NPCI cited the festive season, when digital payments rise, as the reason for not starting the fee now. Customers continue to use the Unified Payments Interface free of charge.
The legal frame matters too. Zero MDR came from Section 10A of the Payment and Settlement Systems Act, 2007, which bars charging MDR on prescribed modes. Any fee must therefore fit within what the government prescribes, while the National Payments Corporation of India sets the operational rules. The balanced answer is a calibrated fee with exemptions for small users, introduced with notice and monitored for its effect on adoption.
Merchant discount rate
What the fee is and who actually pays it.
In one line: The merchant discount rate is the fee a merchant pays for accepting a digital payment, shared among the banks, payment service providers and network that process it.
How it works
When a customer pays by card or UPI, the merchant receives the amount less the MDR. The fee pays for processing, interchange between banks and network switching. It is charged on the merchant side and is not added to the customer's bill, though merchants may pass it on through prices.
Why it is in the news
UPI has been at zero MDR since 1 January 2020. NPCI's framework sets a 0.4% MDR on eligible merchant payments above ₹2,000, capped at ₹300, with a flat ₹5 for specified essential-sector payments above ₹2,000. Its start, set for 15 October 2026, has been deferred to after Diwali.
Where to go next
Payment and Settlement Systems Act, 2007
The law that made UPI free for merchants.
In one line: The Payment and Settlement Systems Act, 2007 is the law under which the RBI regulates payment systems in India, and its Section 10A is the basis of zero MDR.
What it does
The Act requires payment systems to be authorised. NPCI operates under an authorisation under Section 4 of the Act. The Finance (No. 2) Act, 2019 inserted Section 10A, which bars banks and system providers from levying MDR on payers or merchants using prescribed electronic modes.
Why it is in the news
Under Section 10A and a 2019 notification, BHIM-UPI, BHIM-UPI QR codes and RuPay debit cards were made zero-MDR modes from 1 January 2020. The planned 0.4% fee on larger merchant payments is the first major change to this regime for UPI.
Where to go next
National Payments Corporation of India
The body that runs UPI and took the deferral decision.
In one line: NPCI is the umbrella organisation for retail payments in India, incorporated in December 2008 as a not-for-profit company.
Structure and role
NPCI was set up as a joint initiative of the Reserve Bank of India and the Indian Banks' Association. It is authorised under the Payment and Settlement Systems Act, 2007, and operates UPI, IMPS, RuPay and NACH. It sets the operational rules for these systems through its committees.
Why it is in the news
NPCI's UPI and Services Steering Committee decided on 13 October 2026 to defer the UPI merchant discount rate, due from 15 October, until after Diwali, on a date to be notified separately.
Where to go next
Unified Payments Interface
How the system at the centre of the debate works.
In one line: UPI is NPCI's real-time payment system that lets users move money between bank accounts through a mobile app.
How it works
A user links a bank account to a UPI app and pays using a virtual payment address or a QR code. Money moves directly between bank accounts, so a separate prepaid wallet is not needed. This is why UPSC asked in 2017 what the most likely consequence of UPI would be, with the answer that mobile wallets would not be necessary for online payments.
Why it is in the news
UPI has been free for merchants since 2020. The new framework keeps person-to-person transfers and small payments free but charges merchants a 0.4% fee, capped at ₹300, on eligible payments above ₹2,000. Its start has been moved to after Diwali.
Where to go next
Take the 14 October 2026 quiz: 24 Prelims-style questions with answers