What is Merchant Discount Rate and how MDR will be calculated after revised UPI charges

The National Payments Corporation of India (NPCI) announced on Tuesday that a 0.4% fee will be charged on Unified Payments Interface (UPI) transactions to certain merchants when the transaction value exceeds ₹2,000. It also clarified that customers will not have to pay any fee for making UPI payments under the revised system.

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The amount depends on factors such as the payment method, the type of merchant, the transaction value, and the agreement between the businesses involved. In a digital payment system, a customer pays a merchant electronically, while the merchant pays a small fee to the company or bank that processes the transaction.

Although merchants are generally expected to bear this cost, some businesses may add the charge to the customer's bill. This is more common with high-value card payments, where MDR rules are different from those applicable to UPI.

The 0.4% MDR will apply to Person-to-Merchant (P2M) UPI payments exceeding ₹2,000. For transactions of ₹75,000 or more, the charge will be limited to ₹300. For example, a ₹1,00,000 transaction would otherwise attract a 0.4% charge of ₹400.

However, because of the cap, the maximum MDR payable for that transaction will be ₹300. Small merchants covered under the P2PM (Person-to-Person-Merchant) framework will not be charged MDR. The P2PM framework is a separate account category introduced by NPCI for small vendors who receive payments directly into their personal bank accounts.

The small vendor category includes merchants receiving up to ₹1 lakh per month through UPI QR directly into their accounts, the NPCI said in a document. The category is designed to encourage digital payments among small businesses and vendors in the unorganised retail sector.

The MDR is calculated according to the value of each transaction. For a purchase of ₹3,000, the 0.4% rate would mean an MDR of ₹12, which the merchant pays to its acquiring bank. The maximum MDR is ₹300 for transactions of ₹75,000 or more, while payments below ₹2,000 will not incur any MDR.

For a ₹50,000 transaction, the same rate would result in an MDR of ₹200. However, for a payment of ₹1,00,000, the 0.4% charge would be ₹400, but the merchant would pay only ₹300 due to the cap. However, the new percentage-based MDR will not apply to all types of merchants.

Certain categories, including railways, telecom services, insurance, and fuel, will instead be charged a fixed MDR of ₹5 per transaction for payments above ₹2,000. In these cases, merchants will not be charged the 0.4% rate.

They will pay a fixed ₹5 fee irrespective of the total transaction value. The fixed fee helps keep costs under control for essential public services, utility payments and low-margin businesses such as fuel retailers, NPCI said.

NPCI said the MDR collected from high-value transactions will be shared among different participants in the UPI ecosystem. The move aims to help fund the expansion of UPI to more users and merchants, while also supporting spending on resilience, cybersecurity and innovation.

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