UPI Charges for Merchants: How MDR Could Affect Indian Small Businesses

The Government of India (Ministry of Finance) and the National Payments Corporation of India (NPCI) introduced UPI MDR (Unified Payments Interface Merchant Discount Rate), effective from 15th October 2026. The central government amended the Payment and Settlement Systems Act, 2007, to bring sustainability to the digital payments ecosystem.

As a result, UPI charges for merchants will be applicable to some specified transactions. It may seem that all businesses accepting UPI payments will be affected significantly. However, the reality may be different. Explore this article to learn how MDR will impact Indian small businesses in detail.

What is UPI MDR 2026?

UPI MDR is the processing fee charged to merchants for accepting digital payments through UPI. The aim of introducing MDR is to further invest in infrastructure resiliency, cybersecurity, and innovation.

However, not every transaction will be treated the same way. Find out what is the full UPI MDR slab structure below:

How UPI Charges for Merchants Could Affect Indian Small Businesses?

UPI charges for merchants may push small retailers to shift to cash or bank transfers. However, the impact of UPI MDR differs for Indian small businesses in different categories.

Category 1: Small Businesses With Below ₹1 Lakh UPI Transactions

This category includes local tea stalls, home-based micro-entrepreneurs, street vendors, and more. NPCI has created a P2PM framework to support these small businesses. These vendors receiving less than or up to ₹1 lakh per month through UPI QR codes will enjoy a mandatory zero MDR on any transaction amount. 

Example:

Suppose a street tea stall receives ₹70,000 in UPI payments and receives ₹40,000 in cash. Though the total income is (₹70,000 + ₹40,000) = ₹1,10,000, there will be no UPI charges for merchants because they received less than ₹1 lakh in UPI. It remains the same even if it receives more than ₹2,000 in a single transaction.

The Impact:

1. Zero burden on continuing or adopting digital payments.
2. Operational peace of mind without worrying about eroding profit margins.

Factors to Remember

1. Classify Account Types: Ensure your payment gateway correctly classifies your account as P2 PM; otherwise, it will deduct MDR just as P2M.
2. Monitor the Volume: Keep a close eye on monthly volumes, especially in seasonal sales or festival periods, as it may push your UPI intake above ₹1 lakh.

Category 2: Small Businesses With Above ₹1 Lakh UPI Transactions

This category includes small clothing boutiques, retail outlets, local electronics shops, and more that receive more than ₹1 lakh through UPI in a month. According to the NPCI, merchants in these categories will incur a 0.4% MDR on transactions exceeding ₹2,000.

Example:

Suppose a famous street sandwich shop receives more than ₹1 lakh through UPI in a month. If each UPI transaction is less than ₹2,000, there will be no MDR fees. Suppose he has to receive 2 payments of ₹2100 and ₹3500 in a month through UPI. He has to pay (0.4% of ₹2100 + 0.4% of ₹3500) = ₹8.4+ ₹14 = ₹22.4 as MDR fees.

The Impact:

1. MDR may squeeze profit margins as it will directly cut into take-home revenue.
2. Merchants are legally prohibited from passing this fee to customers who use UPI payments.

Factors to Remember

1. Consider Input Tax Credit (ITC): GST-registered businesses can claim the 18% GST on the fee as ITC to reduce tax liability.
2. Alternative Digital payments: Small businesses may accept card payments or provide a bank account number and IFSC code for bank transfer as an alternative to UPI for above ₹2,000.

Final Thought

UPI has become a safe mode of transaction for small and large businesses. Therefore, UPI charges for merchants may vary based on the slab for small businesses. Small businesses with below ₹1 lakh may find significant advantages, compared to those who receive more.

However, for small businesses and enterprises, financial security with a customised commercial safety net is a mandatory aspect.

Confused about whom to trust? Contact Bajaj General Insurance and protect your business from unexpected financial losses with reliable MSME insurance.

FAQs

Are UPI money transfers to friends or family subject to MDR deductions?

No. P2P transfers are not subject to MDR deductions. Only P2M transactions come under this regulation. 

Can I charge my customers extra to cover the MDR?

No. It is legally prohibited. You can request an alternative payment method.

If I receive more than ₹2000 in a UPI transaction, is MDR applicable to the whole amount or the amount exceeding ₹2000?

The MDR applies to the whole transaction, not the amount exceeding ₹2000.

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