Merchants to be charged 0.4% for UPI transactions over ₹2,000; small vendors exempt

UPI transactions exceeding INR 2,000 might incur charges, yet transferring money to friends remains free, according to the latest government notification. The Merchant Discount Rate (MDR), introduced by the government as part of a revised payment framework, does not apply to consumer-to-consumer (P2P) transactions, which will continue to be free of cost.

The MDR provision initially caused confusion, as people mistakenly believed that any amount over Rs 2,000 would be subject to a fee. Now, this misconception has been dispelled, and the government has clarified that any future MDR will only apply to specific merchant transactions above a certain threshold. This clarification means that banks and payment service providers may find a new source of revenue, as each time a merchant accepts a digital payment, an MDR is charged, which is then shared among the banks and other entities involved in processing the transaction.

The transaction fee varies between 1% and 3% of the transaction value for credit cards, and up to 0.9% for debit cards. However, the Standing Committee on Finance has expressed concern that the absence of an MDR could render the UPI ecosystem financially unsustainable, highlighting the need for banks, fintechs, and payment service providers to cover the costs of maintaining the payment infrastructure, including security-related expenses, which account for more than 20% of the running costs of a UPI platform annually.