India has introduced an important change in its digital payment system. From 15 October 2026, merchants will pay a 0.4% Merchant Discount Rate (MDR) on eligible UPI payments above ₹2,000. However, customers will not directly pay this UPI Fee, and person-to-person transactions will remain free regardless of the amount.
The change is important for UPSC, APSC and State PCS examinations because it connects digital payments, financial inclusion, fintech regulation and the Indian economy.
What Is the New UPI Fee in 2026?
The new UPI Fee applies mainly to person-to-merchant (P2M) transactions above ₹2,000. NPCI has fixed the MDR at 0.4% of the transaction value, with a maximum charge of ₹300 per transaction.
For example, if a customer pays ₹5,000 to an eligible merchant through UPI, the MDR at 0.4% would be ₹20. The merchant, rather than the customer, bears this UPI fee.
| UPI Transaction | MDR Rule |
| Person-to-person (P2P) | No charge |
| P2M up to ₹2,000 | No MDR |
| Eligible P2M above ₹2,000 | 0.4% MDR |
| High-value eligible P2M | Maximum ₹300 MDR |
| Specified essential-service categories | Flat ₹5 MDR |
| Eligible small merchants under P2PM | Zero MDR |
Importantly, the Finance Ministry has advised banks to ensure that merchants do not pass the MDR cost to customers.
What Is UPI and How Does It Work?
UPI, or Unified Payments Interface, is an instant digital payment system that allows users to transfer money between bank accounts through mobile applications. It supports both person-to-person (P2P) and person-to-merchant (P2M) payments.
What is UPI?
- UPI stands for Unified Payments Interface. It is an instant digital payment system developed by the National Payments Corporation of India (NPCI).
- UPI enables users to transfer money instantly between bank accounts through mobile devices. It supports both person-to-person (P2P) and person-to-merchant (P2M) transactions.
- NPCI introduced UPI in 2016. The pilot launch took place on 11 April 2016 with 21 member banks, while banks started offering UPI-enabled applications to customers later that year.
- Moreover, UPI works on top of the Immediate Payment Service (IMPS) infrastructure and allows real-time interbank payments.
- Users can make payments through a UPI ID or Virtual Payment Address (VPA), mobile-linked details and QR codes. Therefore, users do not need to repeatedly enter detailed bank-account information for routine transactions.
- Additionally, users can link multiple bank accounts to a single UPI-enabled application and use the platform for sending or requesting money.
- UPI supports a wide range of payment services, including merchant payments, money transfers, recurring payments and other digital transactions.
What Are the Objectives of UPI?
- Promote instant digital payments: UPI aims to make bank-to-bank payments fast and convenient.
- Improve interoperability: It allows users of different participating banks and payment applications to transact through a common payment ecosystem.
- Simplify payments: UPI reduces dependence on traditional bank-account details by enabling payments through UPI IDs, mobile-linked details and QR codes.
- Improve financial inclusion: Moreover, UPI seeks to make digital payment services accessible to a wider population, including users beyond major urban centres.
- Reduce dependence on cash: UPI encourages people and businesses to adopt digital transactions instead of relying only on physical currency.
- Build a secure payment system: Under RBI guidance, NPCI developed UPI around the goals of creating a simple, secure and interoperable payment mechanism.
- Support 24×7 payments: UPI enables users to make real-time payments without depending on traditional banking hours.
- Strengthen India’s digital economy: Finally, UPI supports the wider growth of digital payments, fintech services and India’s Digital Public Infrastructure (DPI).
UPI has become a major pillar of India’s digital payment ecosystem. In 2025–26, India recorded more than 24,000 crore UPI transactions worth ₹314 lakh crore. Interestingly, only about 4% of P2M transactions exceeded ₹2,000, but they represented roughly two-thirds of P2M transaction value.
In Which Other Countries Is UPI Used or Accepted?
- India has gradually expanded the Unified Payments Interface (UPI) beyond its domestic market. Today, Indians can use UPI for merchant payments in several overseas locations, while India has also partnered with other countries to improve cross-border digital payments.
- For example, UPI payments are accepted in countries such as the UAE, Singapore, France, Mauritius, Sri Lanka, Nepal and Bhutan through different partnerships and arrangements. Moreover, the UPI-PayNow linkage between India and Singapore enables users to make real-time cross-border fund transfers.
- Additionally, UPI’s international expansion can make payments easier for Indian travellers and businesses. It can also reduce dependence on cash and simplify certain cross-border transactions.
Therefore, the growing global presence of UPI highlights India’s expanding Digital Public Infrastructure (DPI) and its role in promoting faster and more accessible digital payment systems internationally.
What Is NPCI and What Is Its Role in UPI?
The National Payments Corporation of India (NPCI) operates major retail payment systems in India, including UPI. It sets operational rules and works with banks and payment service providers to maintain the payment ecosystem.
What is NPCI?
- NPCI stands for National Payments Corporation of India. It acts as an umbrella organisation for operating retail payment and settlement systems in India.
- NPCI was incorporated in December 2008 and received its Certificate of Commencement of Business in April 2009.
- Importantly, NPCI operates as a not-for-profit company under Section 8 of the Companies Act, 2013. It was originally incorporated under Section 25 of the Companies Act, 1956.
- Moreover, NPCI functions within India’s regulatory framework for payment and settlement systems, including the Payment and Settlement Systems Act, 2007.
- NPCI has its headquarters in Mumbai, Maharashtra.
- Initially, 10 core promoter banks supported NPCI. Later, its shareholding expanded to include a wider range of banks and regulated payment-sector entities.
What Are the Objectives of NPCI?
- NPCI aims to build a strong, secure and efficient retail payment infrastructure across India.
- It promotes interoperability so that customers of different banks and payment platforms can transact smoothly.
- Moreover, NPCI works to make digital payments accessible, affordable and convenient for a wider section of society.
- It also supports financial inclusion by expanding digital payment services to people and businesses across urban and rural India.
- Additionally, NPCI encourages innovation in payment technologies while improving the speed, security and reliability of transactions.
- Therefore, NPCI supports India’s transition towards a less-cash and digitally connected economy.
What Major Initiatives Has NPCI Taken?
NPCI has developed and operates several important payment systems and platforms:
- Unified Payments Interface (UPI): It enables instant bank-to-bank digital payments through mobile applications.
- RuPay: NPCI developed RuPay as India’s domestic card-payment network.
- Immediate Payment Service (IMPS): It enables instant interbank electronic fund transfers.
- National Financial Switch (NFS): It connects ATMs of participating banks and enables interoperable ATM transactions.
- Aadhaar Enabled Payment System (AePS): It allows customers to access basic banking services using Aadhaar-based authentication through supported channels.
- National Automated Clearing House (NACH): It facilitates high-volume recurring and bulk electronic transactions.
- BHIM: NPCI launched the Bharat Interface for Money (BHIM) as a UPI-based payment application.
- Bharat Bill Payment System (BBPS): It provides an interoperable system for making different types of bill payments.
- NETC FASTag: NPCI supports the National Electronic Toll Collection (NETC) ecosystem, which enables electronic toll payments through FASTag.
How Is NPCI Expanding Internationally?
- NPCI established NPCI International Payments Limited (NIPL) in 2020 as its international subsidiary.
- NIPL works to expand Indian payment technologies such as UPI and RuPay in international markets.
- Moreover, NPCI established NPCI Bharat BillPay Limited (NBBL) to strengthen the Bharat Bill Payment ecosystem.
- It also incorporated NPCI BHIM Services Limited (NBSL) to focus on the growth and development of the BHIM payment application.
Therefore, NPCI is a key pillar of India’s digital payment ecosystem. Through UPI, RuPay, IMPS and other initiatives, it promotes interoperability, financial inclusion and the growth of India’s Digital Public Infrastructure (DPI).
What Is MDR in UPI Payments?
MDR, or Merchant Discount Rate, is the fee merchants pay for processing digital payments. Banks and payment-system participants use such fees to support transaction processing, settlement, security and payment infrastructure.
Therefore, the new UPI Fee does not mean every person sending money through UPI must pay a charge. The MDR applies to specified merchant transactions, while P2P transfers remain free.
Who Is Exempt from the UPI Fee of 0.4%?
Several transactions remain outside of this 0.4% UPI Fee.
- First, all P2P UPI transfers remain free, irrespective of their value. Moreover, merchant payments up to ₹2,000 remain free.
- Small merchants and street vendors receiving up to ₹1 lakh per month through UPI QR codes under the P2PM category also continue to receive zero-MDR protection.
- Meanwhile, specified sectors such as railways, telecom, insurance, fuel, utilities and agricultural inputs attract a flat ₹5 MDR on applicable transactions above ₹2,000 rather than the standard 0.4% rate.
Why Has the UPI Fee Been Introduced?
UPI requires banks, fintech firms and payment companies to maintain large-scale digital infrastructure. The new MDR framework seeks to support a more sustainable payment ecosystem while protecting individuals, small merchants and low-value transactions.
This issue also highlights an important policy challenge. India must balance affordable digital payments with the cost of maintaining secure and reliable payment infrastructure. The payment industry estimated its annual cost for P2M transactions at around ₹20,700 crore.
Conclusion
The new UPI Fee marks an important change in India’s digital payment framework. However, it does not impose a general charge on every UPI user. P2P transactions remain free, while the 0.4% MDR primarily applies to eligible merchant payments above ₹2,000.
Therefore, students should clearly understand the difference between UPI, NPCI, MDR, P2P and P2M transactions. These concepts are increasingly relevant to India’s digital economy, financial inclusion and fintech ecosystem.
UPSC/APSC Prelims Practice Question
Q. With reference to the UPI Fee and Merchant Discount Rate (MDR), consider the following statements:
- The new MDR applies to eligible person-to-merchant (P2M) UPI transactions above ₹2,000.
- Person-to-person (P2P) UPI transactions remain free irrespective of the transaction value.
- The National Payments Corporation of India (NPCI) operates the Unified Payments Interface (UPI).
- Customers must directly pay the 0.4% MDR on eligible UPI transactions.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 1, 2 and 3 only
(c) 2, 3 and 4 only
(d) 1, 2, 3 and 4
UPSC/APSC Mains Practice Question
Q. “The introduction of UPI Fee of 0.4% reflects the need to balance affordable digital payments with a sustainable payment ecosystem.” Discuss. Also examine the role of UPI in promoting financial inclusion and India’s Digital Public Infrastructure. (250 words)
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Frequently Asked Questions
1. What is the UPI Fee in 2026?
The UPI Fee is a 0.4% MDR on eligible person-to-merchant (P2M) payments above ₹2,000. However, the merchant bears this charge, not the customer. The MDR is capped at ₹300 per eligible transaction.
2. Do customers have to pay the 0.4% UPI Fee?
No. Customers do not directly pay the 0.4% UPI Fee. Instead, eligible merchants bear the MDR on applicable payments above ₹2,000. Moreover, person-to-person (P2P) UPI transfers remain free.
3. What are UPI and NPCI?
UPI, or Unified Payments Interface, enables instant digital payments between bank accounts. Meanwhile, NPCI, or National Payments Corporation of India, operates UPI and several other retail payment systems, including RuPay, IMPS and AePS.
