New Delhi: The new Merchant Discount Rate (MDR) framework for UPI payments has brought a major change to the country’s digital payment ecosystem. Under the revised framework, UPI payments of up to ₹2,000 will remain free, while a 0.4% MDR will apply to specified Person-to-Merchant (P2M) transactions above ₹2,000. The new framework will come into effect from October 15, 2026.
The key question now is where the revenue generated through MDR will be used and how it will support the UPI ecosystem.
What Is the New UPI MDR Framework?
The government has amended the Payment and Settlement Systems (PSS) Act, 2007, and a notification under the revised framework was issued on September 14, 2026. The National Payments Corporation of India (NPCI) subsequently issued a detailed circular explaining the categories of UPI transactions that will attract MDR and those that will remain exempt.
The new system does not impose a uniform MDR on every UPI transaction. Instead, transactions have been divided into different categories, with specific rates and exemptions depending on the type of payment.
UPI payments up to ₹2,000 will remain free, while the new MDR will apply to specified merchant transactions above that threshold. Person-to-person (P2P) transactions will continue to remain outside the new merchant MDR framework.
Where Will the MDR Revenue Be Used?
Under the new framework, a small portion of the MDR collected from eligible transactions will go towards a dedicated development fund.
According to the information provided in the framework, 5% of the total MDR collected from specified transactions will be allocated to this fund. The objective is to help make the UPI ecosystem more sustainable and reduce its dependence on government support.
The fund will primarily be used to expand and strengthen digital payment infrastructure in Tier-3 cities and rural areas. It is also expected to support wider UPI acceptance among small merchants and promote the use of digital payment systems.
Focus on Cybersecurity and Digital Infrastructure
Another important area for the revenue will be strengthening the infrastructure supporting the banking and fintech ecosystem.
The additional financial support is intended to help improve areas such as system safety, server capacity and infrastructure related to preventing cyber fraud.
With UPI transactions continuing to grow rapidly, strengthening the underlying infrastructure has become increasingly important for maintaining the reliability and security of the payment system.
What Does PhonePe Say About MDR?
PhonePe founder and CEO Sameer Nigam has said that the 0.4% MDR on eligible merchant UPI transactions above ₹2,000 could support revenue generation for the industry.
According to Nigam, the additional revenue generated through MDR can be reinvested in the growth and expansion of the UPI ecosystem. He has also said that the move could enable industry players to invest more in expanding UPI infrastructure.
UPI Transactions Continue to Rise
UPI usage has continued to increase across India. According to NPCI’s ecosystem statistics, UPI remains one of the country’s largest digital payment systems.
The figures cited in the latest data show that UPI transactions reached 24.51 billion in August, with the total transaction value at around ₹29.82 lakh crore.
The rising transaction volume highlights the growing importance of UPI in India’s digital payment ecosystem and the need for continued investment in infrastructure, capacity and security.
