Govt introduces 0.4% tax on UPI merchant payments above Rs 2,000

The government on Tuesday announced a 0.4 per cent Merchant Discount Rate (MDR) on eligible Unified Payments Interface (UPI) payments of more than Rs 2,000 made to merchants, ending nearly six years of fully free UPI merchant transactions.

The new charges will take effect from 15 October. The Finance Ministry said the MDR would be imposed within the merchant payment ecosystem and would not be charged to customers.

“Customers will not be required to pay any charge when making such payments through UPI,” the ministry said, adding that MDR “is not a charge on customers making UPI payments”.

Person-to-person (P2P) transfers will remain free regardless of the amount, while P2M transactions of up to Rs 2,000 will also continue without MDR. The government said more than 95% of P2M transaction volume falls below the Rs 2,000 threshold.

The 0.4% MDR will be capped at Rs 300 for payments of Rs 75,000 and above. The fee will be shared among banks, payment service providers and other participants in the payment ecosystem.

Essential and thin-margin sectors such as railways, telecom, insurance, fuel and agricultural inputs will instead attract a flat Rs 5 MDR on transactions above Rs 2,000. The same flat-fee treatment will apply to government utility bill payments for electricity, water and piped gas, as well as school and university fee payments above Rs 2,000.

Payments involving mutual funds, securities, stockbrokers and dealers will attract a lower MDR of 0.02%, capped at Rs 300.

The government has also exempted small merchants receiving up to Rs 1 lakh a month through UPI QR codes under the Person-to-Person-Merchant framework. Such merchants will continue to pay zero MDR on all transactions.

UPI AutoPay and other automated recurring payments will also carry no MDR.

The government said UPI app providers would be barred from imposing platform fees or hidden charges and banks had been advised to ensure merchants did not pass the MDR on to customers.

There will also be no monthly quotas, volume restrictions or tiered caps on free UPI transactions for individuals.

The announcement drew criticism from opposition parties. Congress leader Rahul Gandhi described the levy as “once again surrender” by Prime Minister Narendra Modi to alleged US pressure. The BJP accused the Congress of spreading “fake news”, stressing that customers would not be charged for UPI payments.

The move follows years of pressure from banks, fintech companies and payment service providers to introduce a revenue mechanism for UPI. Industry bodies have argued that maintaining the payment network, including servers, fraud prevention systems and technical support, involves substantial costs.

RBI Governor Sanjay Malhotra had earlier said “someone has to pay the cost”, while noting that the decision on MDR rested with the government.

UPI processed 2,451 crore transactions worth Rs 29.9 lakh crore in August 2026, according to government data, underscoring the system's role in India's retail payments ecosystem.

The government said only about 4% of merchant transactions would actually be affected by the new MDR because most transactions either fall below the Rs 2,000 threshold or qualify for exemptions.