UPI MDR from 15 October: How merchant charges compare with credit, debit card fees and credit-linked UPI

The National Payments Council of India (NPCI) has announced merchant discount rate (MDR) on select UPI transactions conducted from person to merchant, effective from October 15.

The revised framework, published on its official website on Tuesday, has kept 95% of low-value UPI transactions below ₹2,000 and small merchant transactions (P2PM) completely free.

While the clarification that consumers would continue to use UPI free of charge had already been issued last month by the Union Finance Minister Nirmala Sitharaman, some confusion persisted. The latest framework reiterates that consumers will transact free-of-cost using UPI, as they have been doing till now.

“Consumers making payments through UPI will not face any charges. Individual account holders can continue using UPI applications for all routine, daily expenses without worrying about any charges. The MDR policy ensures that UPI remain free and accessible for all citizens across India,” NPCI said.

So, who will pay the extra charges?

For certain transactions above ₹2,000, a flat MDR of ₹5 will be applicable. Other person-to-merchant (P2M) UPI transactions above the ₹2,000 threshold will attract an MDR of 0.4%.

The 0.4% charge will be subject to a maximum of ₹300 per transaction, thereby limiting the fee applicable to larger-value payments.

The categories that have been placed under the flat ₹5 charge include payments made towards Indian railways, telecom services, insurance and fuel when the transaction value exceeds ₹2,000.

A separate, much lower MDR of 0.02% will apply to capital-market related UPI payments. This category includes transactions involving mutual funds, securities, stock brokers and dealers. In such cases too, the MDR will also be capped at ₹300 per transaction.

The initiative aims to expand UPI acceptance among small merchants while ensuring that consumers making low-value payments are not impacted.

UPI MDR vs traditional debit, credit card charges

NPCI said that UPI MDR is structured to be much lower than all traditional card-based transaction fees.

Standard credit card MDRs typically range from 1.5% to 2.5% per transaction, while debit card MDRs are capped up to 0.90%, according to the payment body’s FAQs section available online.

By setting the baseline UPI MDR at 0.4% on transaction above ₹ 2,000 and capping it at ₹300 for high-value purchases, UPI remains the most affordable digital payment acceptance tool for commercial enterprises, NPCI said.

It also maintained that this cost difference will help merchants lower their payment processing expenses while accepting digital transactions.

What happens to credit-linked UPI payments?

Credit card-linked UPI payments will not come under the new 0.4% MDR regime, the government has clarified, offering relief to consumers who use credit cards or linked credit facilities to make payments through UPI.

UPI payments made through RuPay credit cards linked to UPI as well as pre-sanctioned bank credit lines, involve credit extended by the issuing bank. Such transactions consequently continue to be governed by the applicable credit card and credit-product regulations.

This is because such transactions involve short-term loans funded by issuing banks, thereby their standard guidelines remain separate.

The revised MDR regime is specifically aimed at direct user-bank-account-to-merchant-bank-account UPI transactions and does not extend to credit-linked payments, as per the official release.

What is MDR and how does it work?

Regulated by the the Reserve Bank of India (RBI), MDR is the fee that businesses pay to banks and payment service providers for processing the online payments made by customers.

Since 2020, this rate has stood at nil for UPI and RuPay debit card transactions, as the central government sought to promote digital payments across the country.

For example, if a customer makes a ₹2,000 purchase using a credit or debit card, the payment is routed through the card network and the banks involved. A small portion of the transaction value is deducted as a charge, while the merchant receives the remaining amount.