UPI MDR rollout deferred beyond Diwali; date yet to be notified

The reintroduction of merchant discount rate (MDR) on select UPI payments has been deferred until after Diwali, giving businesses and payment firms time to prepare for the first significant pricing change on the digital network that has helped revolutionise day-to-day transactions in a country primarily using physical currency until a few years ago.

The UPI and Services Steering Committee Tuesday decided that, in view of the festive season, the levy on select person-to-merchant (P2M) transactions will be implemented immediately after Diwali, the National Payments Corp of India (NPCI) said in a statement. The NPCI will announce the exact starting date later.

The levy was earlier scheduled to take effect from October 15. Diwali, which marks the end of India’s month-long festive season, falls on November 8. ET first reported on July 16 that the government was moving to restore UPI MDR with a Rs 2,000 threshold.

On September 11, it reported that a rate of about 40 basis points was under consideration. NPCI announced the framework on September 15.

One basis point is a hundredth of a percentage point.

Under the new framework, a 40-basis-point MDR will apply to eligible bank account-to-merchant UPI transactions above Rs 2,000, while smaller transactions and exempt merchant categories will continue to remain outside the levy.

ET reported on October 1 that the All-India Mobile Retailers Association and the All-India Consumer Products Distributors Federation had sought a postponement during the festive season, a higher small-merchant exemption threshold and exclusion of merchant-to-merchant payments.

The bodies withdrew their proposed October 2 “No UPI Day” protest after meeting finance minister Nirmala Sitharaman on September 30.

More than 95% of UPI merchant-payment transactions by volume are expected to remain free, limiting the charge largely to higher-value transactions. In value terms, industry estimates suggest a significantly larger share of transactions will attract MDR because payments above Rs 2,000 account for a sizable portion of merchant-payment value.

The introduction of MDR marks a shift from the zero-MDR framework under which merchants have not been charged for accepting bank account-based UPI payments. The government had instead compensated banks and payment companies through an incentive scheme for low-value UPI and RuPay debit-card transactions.

The government has budgeted about Rs 2,000 crore for UPI and RuPay incentives in FY27, significantly below the estimated cost of operating the UPI ecosystem. No subsidy has been paid since April 2025. Earlier payouts stood at Rs 3,631 crore in FY24 and Rs 1,046 crore in FY25.

NPCI chief executive Dilip Asbe had recently said the UPI ecosystem costs about Rs 21,000 crore annually to operate and that the 40-bps charge could help recover around Rs 13,000-15,000 crore in the first year.

Revenue sharing

Under the proposed revenue-sharing arrangement, issuing banks are expected to receive 16 basis points of the 40-bps MDR, while acquiring banks will receive about 12 basis points. The balance will be distributed among consumer-facing applications and payment service providers involved in processing the transaction.

Banks and payment companies expect the revenue stream to support greater spending on technology infrastructure, fraud prevention and capacity as UPI transaction volumes continue to expand rapidly. It could also support newer use cases including B2B collections, delegated payments and agentic transactions.

Payment firms have been stepping up soundbox deployments and sales hiring in smaller towns, betting on MDR income, ET reported earlier this month. BharatPe plans about 50% more soundbox deployments than originally envisaged in selected markets. PhonePe plans over 50 lakh payment devices, including soundboxes and card terminals, and over 20,000 sales hires over 12 months. Pine Labs has separately announced plans for 10 lakh soundboxes.

The authorities have sought to minimise the impact on small merchants and consumers. RBI Governor Sanjay Malhotra had said earlier this month that he did not expect the introduction of a small fee to materially affect transaction volumes.

Industry executives have also argued that a large part of the transaction value that will attract MDR comes from merchants already accepting credit cards and other paid payment instruments, reducing the likelihood of a significant disruption to UPI usage.

The latest decision, therefore, changes the timing rather than the structure of the MDR framework, with the levy now set to kick in after the festive shopping season.