Only 17% of merchants surveyed are willing to bear a MDR of 0.4% on UPI payments above INR 2,000; merchants who were hoping for a nominal 0.04% are left disappointed

September 16, 2026(updated), New Delhi: The Government has barred banks and payment system providers from charging any fee on UPI payments of up to Rs 2,000. The Finance Ministry notified the rule on September 14, 2026 under Section 10A of the Payment and Settlement Systems Act, 2007. The same protection applies to RuPay debit card payments. Payments above Rs 2,000 have been left outside the exemption, creating the legal room for a Merchant Discount Rate (MDR) on higher-value UPI payments. Following the notification, the UPI and Services Steering Committee headed by the National Payments Corporation of India (NPCI) has taken up the MDR framework, with reports indicating a rate of around 0.4% is set to be levied on merchant payments above Rs 2,000. MDR is the fee a merchant pays to banks and payment companies for processing a digital payment. UPI and RuPay debit card payments have carried zero MDR since January 1, 2020.

The notification follows the Taxation and Other Laws (Amendment) Bill, 2026. The Bill was introduced in the Lok Sabha on August 4, 2026 and cleared by the Rajya Sabha on August 10, 2026. It amended Section 10A, which earlier tied zero MDR to payment modes prescribed under Section 269SU of the Income-tax Act, 1961. The Central Government can now specify the exempt payment modes through a simple notification. Finance Minister Nirmala Sitharaman told Parliament that the change was “merely an enabling provision” and “does not impose any tax or transaction charge on UPI users.” She added that no MDR framework had been finalised. Person-to-person UPI transfers will continue to be free.

The rate that merchants will pay is being decided by the UPI and Services Steering Committee headed by NPCI, which has a 22-member composition including public and private banks, small finance banks, UPI apps and industry bodies such as the Payments Council of India and the Indian Banks’ Association. While earlier media reports had suggested an MDR in the range of 0.25% to 0.4%, the indication now is that a rate of about 0.4% will be levied on merchant payments above Rs 2,000. Some reports indicate it may apply only to larger merchants, such as those with an annual turnover above Rs 1.5 crore. The Government has said MDR would apply to a limited set of merchant transactions, at rates much lower than those on cards. It expects over 90% of transactions, including everyday purchases like milk, vegetables and groceries, to remain MDR-free.

The payments industry has long argued that the zero-MDR model is not sustainable. The Payments Council of India (PCI) has sought a regulated MDR of 0.3% on UPI merchant payments for businesses with an annual turnover above Rs 20 lakh. The Union Budget 2026-27 allocated Rs 2,000 crore to incentivise low-value UPI and RuPay debit card merchant payments. This is lower than the FY26 revised estimate of Rs 2,196 crore, while the industry had sought over Rs 10,000 crore. The Government has cited the need for continuous upgrades in cybersecurity and fraud prevention, and for UPI to become self-sustaining.

The stakes are high. UPI processed 24.51 billion transactions worth Rs 29.82 lakh crore in August 2026. Its annual transaction value has grown from Rs 0.07 lakh crore in FY17 to Rs 314 lakh crore in FY26. Consumers too are sensitive to any charge. In a LocalCircles survey released on August 4, 2026, 53% of UPI users said they would move away from UPI for payments above Rs 3,000 if merchants passed on the MDR. Of them, 27% would switch to credit cards, 14% to debit cards and 12% to cash or bank transfers.

With MDR on higher-value UPI payments now legally possible, LocalCircles conducted a national survey to find out how much MDR merchants and businesses are willing to bear on UPI payments above INR 2,000. The survey received over 32,000 responses from businesses/merchants located in 242 districts of India. 48% respondents were from tier 1, 33% from tier 2 and 19% respondents were from tier 3 & 4 districts.

Only 17% of merchants surveyed are willing to bear a MDR of 0.4% on UPI payments above INR 2,000; merchants who were hoping for a nominal 0.04% are left disappointed

The survey asked merchants and businesses, “If you are a business that accepts UPI payments, how much is the maximum MDR that you would be willing to bear on UPI payments above INR 2000?” This query received 32,796 responses. Of these, 41% said they “will not bear any MDR charges”, while 9% said they “don’t accept UPI payments”.

Among the rest, 15% of merchants would bear a maximum MDR of 0.04% – the nominal rate many were hoping for. 5% each would bear up to 0.1%, 0.2% and 0.5%, while 8% would bear up to 0.25% and 12% up to 1%. None of the respondents picked 0.08%.

Taken together, 50% or 1 in 2 merchants surveyed are willing to bear an MDR of at least 0.04%, the nominal rate. But this share falls sharply as the rate goes up. 35% would bear an MDR of 0.1% or more, 25% would bear 0.25% or more, and only 17% would bear 0.4% or more. This matters because the rate now set to be levied is around 0.4%. At 0.4%, only 17% of merchants surveyed would be willing to absorb the charge, meaning 83% of those who accept UPI would not. In effect, the large body of merchants who had hoped for a nominal 0.04% MDR – to which only 15% said yes and 50% were open at that level – find themselves facing a rate ten times higher. To sum up, only 17% of merchants surveyed by LocalCircles are willing to bear a MDR charge of 0.4% on UPI payments above INR 2,000, while 41% will not bear any MDR at all.

In summary, merchants are largely unwilling to bear the 0.4% MDR that is now on the table for UPI payments above INR 2,000. Half of the merchants surveyed were open to a nominal MDR of 0.04%, but only 17% are willing to bear 0.4% and 41% will not bear any charge at all. Merchants who were hoping for the nominal 0.04% rate are therefore left disappointed with the 0.4% level the NPCI steering committee is expected to set. The September 14, 2026 notification keeps everyday UPI payments of up to Rs 2,000 free, but the rate for higher-value payments, now leaning towards 0.4%, sits well above what most merchants say they can absorb.

The findings suggest that a nominal MDR has the best chance of acceptance. A rate close to 0.04% is acceptable to half the merchants surveyed, but a rate of 0.4% – the level now expected – is acceptable to only 17%. The gap between what merchants are willing to bear and the rate being finalised is stark. Merchants unable to absorb the 0.4% charge may pass it on to customers, discourage UPI or push for cash. LocalCircles’ earlier survey shows that over half of UPI users would then move away from UPI for higher-value payments. This could undo some of the gains India has made in digital payments.

As the steering committee decides on the MDR framework, merchants’ ability to pay must be at the centre of the decision. A nominal rate for a start, a clear turnover-based exemption for small merchants and a review after a fixed period would help ease the transition. Consumers must also be protected from surcharges. The final framework should be made public well before any charge comes into effect, giving merchants and users adequate time to prepare.