Last Updated: September 20, 2026
India's UPI payment system is about to enter a new phase.
From October 15, 2026, a 0.4% Merchant Discount Rate (MDR) will apply to specified Person-to-Merchant (P2M) UPI transactions above ₹2,000. The MDR will be capped at ₹300 per transaction for transactions of ₹75,000 and above.
The announcement has created a new question among UPI users and merchants:
If a merchant receives ₹10,000 through UPI, where does the ₹40 MDR actually go?
The answer is not simply “PhonePe gets ₹40” or “NPCI gets ₹40.”
MDR is a charge within the payment ecosystem. According to the government's clarification, it is not a tax collected by the government or NPCI. Instead, the revenue is distributed among participating entities in the payment ecosystem, including banks and payment application providers.
That makes the new UPI charge more complicated than the viral ₹40 calculation suggests.
Quick Summary
| Key Point | What It Means |
|---|---|
| New MDR | 0.4% on specified P2M UPI transactions above ₹2,000. |
| Effective Date | October 15, 2026. |
| ₹10,000 Payment | 0.4% works out to ₹40 MDR if the transaction is covered. |
| Who Pays? | The applicable merchant bears the MDR. |
| Customer Fee | No direct UPI transaction fee is imposed on customers under this framework. |
| P2P Payments | Person-to-person UPI transfers remain free. |
| ₹2,000 or Less | P2M transactions up to ₹2,000 remain free of MDR. |
| ₹75,000 and Above | MDR is capped at ₹300 per transaction. |
| Small Merchants | Qualifying small merchants can remain under zero-MDR protection. |
What Happens When You Pay ₹10,000 Through UPI?
Imagine that you buy furniture worth ₹10,000 from a merchant and pay using a UPI application.
If the transaction falls within the new MDR framework, the calculation is straightforward:
₹10,000 × 0.4% = ₹40
So, the applicable merchant-side MDR is ₹40.
But there is an important distinction:
₹40 is the MDR amount. It is not a ₹40 fee charged separately to the customer.
The government has stated that customers will continue to make UPI payments without a direct transaction fee under the new framework.
Who Is Involved in a UPI Payment?
A UPI payment may look like a simple transaction between a customer and a shopkeeper, but several parts of the payment ecosystem can be involved.
1. UPI Application
You may use an application such as PhonePe, Google Pay, Paytm or another UPI-enabled application to initiate the payment.
The application provides the interface through which you select the merchant, enter the amount and authorise the transaction.
2. PSP Bank
UPI applications operate through participating banks known as Payment Service Provider (PSP) banks. These banks provide the banking connectivity required for UPI applications to function.
3. NPCI
The National Payments Corporation of India (NPCI) operates the UPI payment infrastructure. NPCI connects participating members and provides the underlying payment network.
4. Customer's Bank
The customer's bank handles the debit from the customer's account when the payment is authorised and processed.
5. Merchant-Side Bank and Payment Participants
The merchant-side banking and payment infrastructure handles the receipt and settlement of funds for the merchant.
This means the real payment ecosystem is considerably more complicated than:
Customer → UPI App → Shopkeeper
So Where Does the ₹40 MDR Go?
This is the most important part of the controversy.
The government has specifically clarified that MDR is not a tax collected by the Government or NPCI.
Instead, it is distributed among participants in the payment ecosystem, including banks and payment application providers.
Reuters also reports that merchants pay the fee to banks processing the transactions, with a portion passed on to payment applications that facilitate the payments.
Therefore, it would be inaccurate to claim that the entire ₹40 automatically goes to:
- PhonePe
- Google Pay
- Paytm
- NPCI
- The Government
There is also no reliable basis for presenting a universal fixed split such as:
- ₹12 to one bank
- ₹8 to PhonePe
- ₹4 to another participant
- ₹16 to another bank
Such a breakdown should not be presented as the standard formula for every UPI transaction.
Does PhonePe Get the Entire ₹40?
No.
PhonePe is a payment application operating within the UPI ecosystem. It is not the sole recipient of the MDR.
The same principle applies to Google Pay, Paytm and other UPI applications.
The payment ecosystem involves banks, payment applications and other participating entities, with revenue distributed according to the applicable arrangements.
Reuters reported that a portion of the merchant-paid MDR can flow to payment applications such as PhonePe and Google Pay, while banks also participate in the revenue structure.
Does NPCI Get the ₹40?
No — not the entire amount.
NPCI operates the UPI infrastructure, but the government has explicitly clarified that the MDR is not a charge collected by NPCI.
Instead, the MDR is distributed among payment ecosystem participants, including banks and payment application providers.
Therefore, the statement “NPCI gets the ₹40” is also misleading.
Are All UPI Payments Above ₹2,000 Charged 0.4%?
No.
The new framework applies to specified Person-to-Merchant (P2M) transactions.
Several important categories remain outside the standard 0.4% MDR structure.
| Transaction / Category | Treatment |
|---|---|
| P2P UPI transfers | Remain completely free. |
| P2M payments up to ₹2,000 | Remain free of MDR. |
| Specified P2M payments above ₹2,000 | 0.4% MDR applies, subject to the applicable rules. |
| Transactions of ₹75,000 and above | MDR capped at ₹300 per transaction. |
| Qualifying small merchants | Remain eligible for zero-MDR protection under the applicable framework. |
| Specified essential-service categories | Special MDR treatment applies rather than the standard rate. |
The Ministry of Finance says approximately 96% of P2M transactions will remain unaffected by the new MDR framework.
What About Small Merchants?
This is another important part of the new framework.
The government says qualifying small merchants receiving up to ₹1 lakh per month through UPI QR payments can continue under zero-MDR protection.
This is particularly relevant for street vendors, neighbourhood shops and other small businesses.
It is important to understand that ₹1 lakh is a merchant's monthly UPI receipt threshold, not a customer's UPI payment limit.
What Happens to a ₹1 Lakh UPI Payment?
At the standard 0.4% rate, ₹1,00,000 would mathematically produce:
₹1,00,000 × 0.4% = ₹400
However, the framework caps the MDR at ₹300 for transactions of ₹75,000 and above.
Therefore, a covered ₹1 lakh transaction would attract a maximum MDR of:
₹300
It would not produce a ₹400 MDR because of the cap.
Why Is There a ₹300 Cap?
The cap prevents the MDR from continuing to rise proportionally on very large UPI transactions.
At 0.4%:
- ₹10,000 → ₹40 MDR
- ₹25,000 → ₹100 MDR
- ₹50,000 → ₹200 MDR
- ₹75,000 → ₹300 MDR
- ₹1,00,000 → ₹300 MDR because of the cap
This means that once the transaction reaches the ₹75,000 threshold, the standard MDR no longer increases beyond ₹300.
What About Person-to-Person UPI Payments?
This part remains simple.
If you send ₹10,000 to a friend or family member using UPI, the new merchant MDR does not apply.
The Ministry of Finance has confirmed that all person-to-person UPI transactions will remain free regardless of the amount transferred.
So:
₹10,000 to a friend → No MDR
₹10,000 to an eligible merchant → ₹40 MDR paid by the merchant
Can the Merchant Add the ₹40 to Your Bill?
The new framework is designed so that the MDR is not directly passed on to the customer as a UPI surcharge.
The government has said customers should not be charged a separate UPI transaction fee, and banks have been directed to prevent the MDR from being transferred directly to users.
However, there is an important practical distinction.
A merchant could theoretically change its prices or payment preferences for broader commercial reasons. That is different from the merchant adding an officially authorised “UPI fee” to the customer's transaction.
Therefore, “customer pays ₹40 UPI charge” is not the correct description of the new MDR framework.
Why Is UPI MDR Being Introduced?
UPI has operated under a zero-MDR model for several years, supported by government measures and incentives.
The system now handles enormous transaction volumes. NPCI's official statistics show that UPI processed approximately 24.51 billion transactions worth ₹29.82 lakh crore in August 2026.
The government has described the new framework as a way to support the long-term sustainability and expansion of the UPI ecosystem while keeping P2P transfers and most merchant transactions free.
Reuters similarly reported that authorities view MDR as a way to make UPI more financially sustainable and support expansion, including in rural and semi-urban areas.
Why Are Merchants Concerned?
The new MDR creates a cost for certain merchants that previously received UPI payments without this merchant-side charge.
Retail groups and other businesses have raised concerns that even if customers are not directly charged, merchants could face additional costs, particularly in sectors with narrow profit margins.
Some merchant organisations have also raised concerns about whether the cost could indirectly influence payment preferences or encourage some businesses to favour cash.
These are concerns about the economic impact of the policy, rather than evidence that customers are being directly charged a ₹40 UPI fee.
The Most Important Difference
| Common Claim | What the Current Framework Says |
|---|---|
| “PhonePe gets the ₹40.” | Incorrect. The MDR is distributed across relevant payment-ecosystem participants. |
| “NPCI gets the ₹40.” | Incorrect. The government says MDR is not a charge collected by NPCI. |
| “The government gets the ₹40.” | Incorrect. MDR is not a government tax. |
| “The customer pays an extra ₹40.” | The MDR is a merchant-side charge, not a direct customer UPI fee. |
| “Every UPI payment above ₹2,000 costs 0.4%.” | No. The standard rate applies to specified P2M transactions, with exemptions and special categories. |
| “There is a fixed ₹12/₹8/₹4/₹16 split.” | No universal fixed split should be assumed without the applicable commercial arrangements. |
The Simple ₹10,000 Example
| Particular | Amount / Treatment |
|---|---|
| Customer pays | ₹10,000 |
| Transaction type | Eligible P2M transaction |
| MDR rate | 0.4% |
| MDR calculation | ₹10,000 × 0.4% = ₹40 |
| Direct customer UPI fee | ₹0 |
| Merchant-side MDR | ₹40 |
| Who ultimately receives the MDR? | Relevant payment-ecosystem participants according to the applicable arrangements. |
What Does This Mean for an Ordinary UPI User?
For most everyday users, the immediate impact is limited.
You can continue to:
- Send money to friends and family through UPI.
- Make P2P transfers of any amount without MDR.
- Make merchant payments up to ₹2,000 without MDR.
- Use qualifying small merchants that remain under zero-MDR protection.
The main change affects specified higher-value merchant transactions.
So the headline “UPI is no longer free” is too broad.
A more accurate description is:
Selected merchant-side UPI transactions above ₹2,000 will attract MDR from October 15, 2026, while P2P payments and most smaller merchant transactions remain free.
Frequently Asked Questions
When will the new UPI MDR start?
The new framework is scheduled to take effect from October 15, 2026.
How much is the new UPI MDR?
The standard MDR is 0.4% for specified P2M UPI transactions above ₹2,000, subject to exemptions, special categories and the applicable cap.
How much MDR applies to a ₹10,000 UPI payment?
If the transaction is covered by the standard MDR framework, 0.4% of ₹10,000 equals ₹40.
Does the customer pay the ₹40?
No. The MDR is charged on the merchant side. The government has stated that customers will continue to make UPI payments without a direct transaction fee under the new framework.
Does PhonePe receive the entire ₹40?
No. The MDR is part of the broader payment ecosystem's revenue structure and is distributed among relevant participants.
Does NPCI receive the entire MDR?
No. The government explicitly says MDR is not a charge collected by NPCI. It is distributed among payment ecosystem participants, including banks and payment application providers.
Are P2P UPI payments affected?
No. Person-to-person UPI transactions remain free regardless of the amount transferred.
What happens to payments of ₹75,000 or more?
For covered transactions of ₹75,000 and above, the MDR is capped at ₹300 per transaction.
Will small merchants pay MDR?
Qualifying small merchants receiving up to ₹1 lakh per month through UPI QR payments can remain under zero-MDR protection, subject to the applicable classification and rules.
Is the ₹2,000 threshold a customer payment limit?
No. It is the threshold used to determine when the standard MDR can apply to specified merchant transactions. It does not mean customers cannot make UPI payments above ₹2,000.
Final Thoughts
The new UPI MDR framework has created confusion because the calculation is simple while the payment ecosystem behind it is not.
For an eligible ₹10,000 merchant transaction:
0.4% = ₹40 MDR.
But that ₹40 is not a direct fee charged to the customer, nor is it a ₹40 payment automatically received by PhonePe, Google Pay, Paytm, NPCI or the government.
Instead, MDR forms part of the payment ecosystem's revenue structure, with relevant banks, payment application providers and other participants involved according to their roles and applicable arrangements.
The government has also kept important parts of UPI outside the new MDR framework. P2P transfers remain free, merchant payments up to ₹2,000 remain free, and qualifying small merchants remain protected by zero-MDR provisions.
So the simplest way to understand the change is:
₹10,000 eligible merchant payment → ₹40 MDR → paid on the merchant side → distributed within the payment ecosystem.
The exact commercial allocation should not be presented as a fixed universal percentage split unless the applicable arrangement specifically establishes it.
Important Note
The new MDR framework is scheduled to begin on October 15, 2026. The treatment of individual merchant categories, exemptions and ecosystem-level revenue arrangements should be checked against the latest applicable NPCI and government notifications as implementation progresses.
This article therefore does not present an unverified fixed split of the ₹40 among PhonePe, Google Pay, banks, PSPs or NPCI.
