UPI’s Zero-MDR Model: A Policy That Was Bound to Change?
Introduction : Unified Payments Interface (UPI) has been a promising technology of India’s digital economy for years. Be it a roadside peddler/vendor or a large retailer, it has made digital payments instant and without a visible transaction fee. The “free” payment system often raises an economic question: who pays for the infrastructure that makes such transactions free? The question suddenly becomes relevant because from 15th October 2026, a Merchant Discount Rate (MDR) of 0.4% on specified person-to-merchant UPI transactions above ₹2,000 is introduced by the National Payments Corporation of India (NPCI). However, an upper limit for such a charge is ₹300 for transactions of ₹75000 or more, and consumers will not be subjected to it when person-to-person transactions are made.
Why was the MDR Model Abolished?
MDR is a fee that is paid for processing digital payments. The traditional payment systems see it as a mechanism through which banks, payment processors and other parties involved recover some cost of operation. India, from January 2020, disrupted this model for BHIM-UPI and RuPay transactions so as to promote India’s transition towards a cashless economy and also merchant participation.
The policy made sense at that point in time from an adoption perspective. For instance, just because digital payments involve a processing expense, it makes no justification for merchants to reject UPI. Similarly, for consumers, there is no incentive to prefer cash over digital payments for the sole reason that UPI has transaction fees. The result was extraordinary growth in UPI usage. Transaction values increased from ₹21.3 lakh crore in FY 2019–20 to ₹260.56 lakh crore by March 2025, while P2M transactions alone reached ₹59.3 lakh crore. Ironically, its success created a new problem of maintainability at a larger scale.
Economics Behind Free UPI
It would be wrong to say UPI is “free”. The users may not pay any fees; however, transactions necessitate certain infrastructure, a banking system, fraud preventive measures, customer support and ongoing investment. Through various programs, the government attempted to resolve the issue. For instance, a ₹1,500-crore incentive program for low-value BHIM-UPI P2M transactions involving small merchants was approved by the Union Cabinet for FY 2024–2025. The program allows qualified transactions up to ₹2,000 to get a 0.15% bonus without being subject to MDR. This system supported UPI to expand without losing the attractiveness of its model. This also means that cost will be incurred from the public expenditure, which raises a question: is it really plausible for a national payment system to rely upon government-backed incentives in order to make up for the absence of transaction-based revenue?
The Load On Fintech And Banks
It’s not a surprise that UPI transactions generate massive volumes but this volume itself does not mean direct payment processing revenue. While putting resources into security protocol, fraud identification, customer assistance, banks, payment processors and software programs, they nevertheless need to maintain their systems in order to handle massive transaction rates. The government has acknowledged that digital payment providers have expenses related to risk management, cybersecurity, technical infrastructure, customer support, and compliance. However, it does not indicate that banks and fintech companies have not been able to taste the benefits from UPI. Their carefully crafted business model helps them acquire a customer base, providing other financial services and getting themselves involved in the wider ecosystem of digitalisation.
One problem persists anyway, that rapid expansion of the payment network can’t treat technological infrastructure as less costly merely on the basis that the user interface is free. And this is exactly where the new MDR model becomes relevant.
High Value Transactions Are Treated Differently
Instead of switching UPI into a generic paid service overnight, the new model chooses a much more strategic approach. It introduces a tier-based system which carefully categorises transactions. Day-to-day peer-to-peer transactions remain completely free, while normal retail shopping stays completely untouched with merchant payments up to ₹2000. As per the government, 96% of the P2M transactions will remain unaffected. Things do change: if specific P2M transactions above ₹2000 is made then 0.4% MDR will carry. The fee is absorbed within the merchant ecosystem, and consumers won’t see any extra charges at the time of making payment.
To mitigate the risk of heavy fees on large payments, transactions above ₹75000 or more will be capped at ₹300 as a maximum fee. Meanwhile, essential sectors such as railways, telecom, insurance, fuel and agro-goods get relief with a flat ₹5 charged instead of a percentage. The distinction is important for preserving a completely free experience for everyday shoppers while side by side building a fair, sustainable revenue framework to suit different sizes of enterprises and industries. The headline is not about UPI is ending its free era, but the blanket zero-MDR is paving the way to a smarter and tiered model.
Policy Correction Or Policy Reversal?
This question is heavily dependent upon one’s belief on why the original zero-MDR was intended to achieve. In a condition where zero-MDR was only an “adoption model”, then it has achieved its purpose already. To subsidize every category is not necessary in exactly the same manner is not necessary. But if zero-MDR was to be seen as a permanent cornerstone for Indian digital payment architecture, then the new model replaces the previous one and hence a departure to zero-MDR.
The legitimate concern persists on the side of merchants. Although customers are not allowed to bear the MDR directly, the businesses ultimately operate on margins. The policymakers should also consider that MDR does not undermine the very merchant adoption that helped in growing UPI and making it successful.
Conclusion
The discussion on MDR must go beyond 0.4% and ₹5. The fundamental concern is the economics of digital infrastructure for the public. Yes, zero-MDR played a crucial role in making UPI accessible, and government incentives subsequently aided in sustaining the whole ecosystem while protecting the stakeholders. But as UPI has grown into a massive payment system nationwide, it becomes impossible to ignore the question of long-term financial sustainability. The question is whether India can manufacture a payment system that remains affordable for consumers, feasible for merchants and financially sustainable for the institutions that keep it in the market.
Author: Chirayu Shrivastava in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney
References
Press Information Bureau, Government of India, ‘New UPI Framework: Clarifications on MDR and Consumer Charges’ (15 September 2026). https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2310586&lang=2®=48&utm
Press Information Bureau, Government of India, ‘₹1,500 Cr Incentive Scheme for Low-Value BHIM-UPI Transactions’ (24 March 2025). https://www.pib.gov.in/PressNoteDetails.aspx?ModuleId=3&NoteId=154017&lang=2®=3&utm
Press Information Bureau, Government of India, ‘Cabinet approves Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions (P2M)’ (19 March 2025). https://www.pib.gov.in/PressReleasePage.aspx?PRID=2112771&lang=2®=48&utm
Press Information Bureau, Government of India, ‘Advancing Cashless India: ₹1,500 Cr Incentive Scheme for Low-Value BHIM-UPI Transactions’ (24 March 2025). https://www.pib.gov.in/PressReleasePage.aspx?PRID=2114335&lang=2®=48&utm
National Payments Corporation of India (NPCI), ‘Unified Payments Interface (UPI) — Product Statistics’ (2026). https://www.npci.org.in/product/upi/product-statistics?utm
National Payments Corporation of India (NPCI), ‘Unified Payments Interface — Instant Mobile Payments’. https://www.npci.org.in/product/upi?
Comments