Starting October 15, 2026, a 0.4% fee applies to UPI merchant transactions above ₹2,000. Regulators have strictly banned retailers from passing this cost to consumers. While the move aims to support payment infrastructure, it faces scrutiny due to an ongoing Supreme Court legal challenge and concerns from small businesses about absorbing the extra costs.
Starting October 15, 2026, the digital payment system in India will see a structural change as a 0.4% Merchant Discount Rate (MDR) goes into effect for payments made through the Unified Payments Interface (UPI). This fee applies specifically to person-to-merchant (P2M) transactions that exceed ₹2,000. To prevent excessive costs on high-value transactions, the fee is capped at a maximum of ₹300 per transaction. This framework is designed to help sustain the infrastructure that supports digital payments, ensuring the system remains functional and efficient for the long term.
Consumer Protection and Merchant Rules
A critical part of this update is the protection of retail consumers. Banking authorities and leadership from financial institutions, including the Managing Director of Punjab & Sind Bank, have clarified that merchants are not allowed to pass these costs onto buyers. This means businesses are strictly prohibited from adding a surcharge or extra fee at the point of sale to recover the 0.4% levy. The policy aims to ensure that digital payments remain the preferred and friction-free choice for daily commerce, preventing consumer backlash or hidden charges that could discourage the use of UPI.
Exemptions and Market Challenges
Not every business will be subject to these new fees. Small merchants, defined as those receiving less than ₹1 lakh per month via QR code payments, are fully exempt. This exemption is intended to shield the smallest retailers who might struggle the most with additional transaction costs. However, the introduction of this fee has sparked concerns among the broader business community, particularly among firms operating on thin profit margins.
Research indicates that a majority of merchants may be reluctant to absorb these costs, raising questions about whether some businesses might shift preferences toward cash transactions to avoid the fee. Furthermore, the regulatory framework is currently facing a legal challenge in the Supreme Court. While no stay has been granted and the policy moves forward, the pending legal matter adds a layer of uncertainty to the implementation. The next important monitorables will include how merchant compliance evolves after the October 15 launch and whether there are any significant shifts in the volume of UPI transactions at the retail level.