UPI's free ride faces a post-Diwali twist

UPI MDR charges deferred until after Diwali

Mumbai: The introduction of merchant discount rate (MDR) on select UPI merchant payments has been deferred until after Diwali, giving merchants and payment companies more time to prepare for the first significant pricing change in India’s largest digital payments network.

The UPI and Services Steering Committee on Tuesday decided that, keeping in mind the festive season, the levy on select person-to-merchant (P2M) transactions will be implemented immediately after Diwali. The exact date will be notified separately.

The charge was earlier scheduled to take effect from October 15.

Also Read: MDR a small fee, will not have major impact on UPI volumes: RBI Guv Malhotra

Under the new framework, a 40-basis-point MDR will apply to eligible bank account-to-merchant UPI transactions above Rs 2,000, while smaller transactions and exempt merchant categories will continue to remain outside the levy.

More than 95% of UPI merchant-payment transactions by volume are expected to remain free, limiting the charge largely to higher-value transactions. In value terms, industry estimates suggest a significantly larger share of transactions will attract MDR because payments above Rs 2,000 account for a sizeable portion of merchant-payment value.

The introduction of MDR marks a shift from the zero-MDR framework under which merchants have not been charged for accepting bank account-based UPI payments. The government had instead compensated banks and payment companies through an incentive scheme for low-value UPI and RuPay debit-card transactions.

Also Read: UPI vs debit vs credit cards: Will UPI payments with MDR charges still be cheapest?

The government has budgeted about Rs 2,000 crore for UPI and RuPay incentives in FY27, significantly below the estimated cost of operating the UPI ecosystem. No subsidy has been paid since April 2025. Earlier payouts stood at Rs 3,631 crore in FY24 and Rs 1,046 crore in FY25.

NPCI chief executive Dilip Asbe had recently said the UPI ecosystem costs about Rs 21,000 crore annually to operate and that the 40-bps charge could help recover around Rs 13,000-15,000 crore in the first year.

Under the proposed revenue-sharing arrangement, issuing banks are expected to receive 16 basis points of the 40-bps MDR, while acquiring banks will receive about 12 basis points. The balance will be distributed among consumer-facing applications and payment service providers involved in processing the transaction.

Banks and payment companies expect the revenue stream to support greater spending on technology infrastructure, fraud prevention and capacity as UPI transaction volumes continue to expand rapidly. It could also support newer use cases including B2B collections, delegated payments and agentic transactions.

The authorities have sought to minimise the impact on small merchants and consumers. RBI Governor Sanjay Malhotra had said earlier this month that he did not expect the introduction of a small fee to materially affect transaction volumes.

Industry executives have also argued that a large part of the transaction value that will attract MDR comes from merchants already accepting credit cards and other paid payment instruments, reducing the likelihood of a significant disruption to UPI usage.

The latest decision therefore changes the timing rather than the structure of the MDR framework, with the levy now set to kick in after the festive shopping season ends.