It’s Not A Tax. So What Is It?

Written By KAPIL SACHDEV

For six years, paying by UPI didn’t cost anybody anything. That changes on 15th October, 2026 — but only for a slice of transactions.

What just happened

  • 2020-2026: UPI grows. Government subsidises the system for everyone so it stays free for everyone, users and merchants alike.

  • 15th September, 2026: NPCI (the body that runs UPI) issues a circular introducing a Merchant Discount Rate, which is a small fee on select merchant payments.

  • 15th October, 2026: The new framework takes effect. Consumers still pay nothing extra. Some merchants start seeing a deduction in their settlements.

MDR, simply

MDR stands for Merchant Discount Rate. It is a small cut a merchant pays out of what they receive, to the banks and apps that process the payment. Card payments have already carried one. UPI, till now, didn’t.

Take a tea stall, for instance. The revenue of the merchant is ₹40. No MDR is paid by him. On the other hand, take a sneaker store. Their revenue is ₹3000. The MDR is 0.4% of 3000, which is ₹12, leaving the merchant with ₹2988.

This leaves us with the question, who exactly pays for what?

  • Peer-to-peer (P2P) transfer → Free, always

  • Any merchant upto ₹2000 → Free

  • Small merchants — under ₹1 lakh per month in UPI QR receipts → Free

  • Merchant payments above ₹2000 → 0.4% of the amount

  • Same, on ₹75000 and above → Capped at ₹300

  • Railways, telecom, insurance, fuel, farm inputs → Flat ₹5

  • Mutual funds, stockbrokers, SIPs via autopay → 0.02% of amount or free

Government estimates put small, exempt merchants at roughly 95-96% of all UPI merchant transactions. So for most shopkeepers, nothing changes.

Where does that 0.4% go?

  • 40% of MDR collections will go to customer’s bank

  • 30% will go to payment gateways

  • 20% to the UPI app

  • 10% to the sponsoring bank of the UPI bank

The Pushback

Not everyone is convinced. Trader groups in several cities have protested — some shops in Ghaziabad put up signs refusing UPI altogether and traders in Indore organised a no UPI day.

This is a real-world case of a classic problem: who pays for infrastructure that everyone treats as free? UPI processes billions of transactions a month, and running that system, whether it be servers, settlement, fraud checks or bank rails, costs real money. For six years, the government picked up that tab.

The MDR is an attempt to shift UPI from a subsidised public good toward a self-sustaining one, without breaking the thing that made it succeed: universal, zero-cost access for ordinary payments.

KAPIL SACHDEV