New UPI Framework: What Users and Merchants Need to Know

The new UPI framework has raised questions about whether people will have to pay extra charges when using UPI. The important point is that person-to-person (P2P) UPI payments will remain completely free, no matter how much money is transferred.

Transactions worth up to ₹2,000 for merchants will also continue to be exempt from MDR. However, MDR will be charged on certain merchant transactions beyond ₹2,000.

What Type of Transactions Through UPI Are Free?

The new framework keeps many everyday UPI payments free. This implies that people and qualified small businesses will not be subjected to extra costs when making such payments.

• Transferring funds to someone else: No matter the amount, all P2P transactions via UPI will continue to be completely free.
• Receiving money: Individuals can continue to receive money through UPI without a charge.
• Pay merchants up to ₹2,000: Payments to merchants up to ₹2,000 will be exempt from MDR charges.
• Small merchants: Small merchants who receive payments up to ₹1 lakh per month using UPI QR codes will have zero MDR.

These rules ensure that many common UPI transactions can continue without additional payment costs.

When Will MDR Apply to UPI Payments?

The application of MDR (Merchant Discount Rate) would be applicable only to specific merchant transactions in the new framework.

MDR is a fee in the UPI payment system and is not a tax levied by the Government or NPCI. The amount is shared among different participants involved in processing the payment.

The Main MDR Rules

• Merchant payments above ₹2,000: The merchant discount rate for selected transactions shall be 0.4%.
• Payments above ₹75,000: The merchant discount rate is capped at ₹300 per transaction.
• Essential services: Selected transactions above ₹2,000 in sectors like railways, telecoms, insurance, petroleum products, and farm inputs will have a fixed MDR of ₹5 per transaction.
• Capital markets transactions: Transactions involving mutual funds, securities, stock brokers, and dealers will have a cap of 0.02% MDR, up to ₹300.

The MDR collected will be shared among payment system participants such as banks, payment service providers, and UPI application providers.

Do Customers Have to Pay MDR?

NO. Customers should not be asked to pay MDR. This is because MDR is the fee charged among the parties involved in the merchant payment system and does not constitute an extra payment for customers in UPI transactions.

• Customers will not pay MDR.
• Banks have been told to ensure that merchants do not pass the MDR to consumers.
• UPI application providers are prohibited from adding platform fees or hidden charges under this framework.
• Individuals will continue to enjoy free UPI transactions without any monthly limit.

For instance, if a transaction done by a merchant is ₹10,000 and has an MDR of 0.4%, then the MDR will be ₹40. The ₹40 MDR should not be charged as an additional fee on the customer's UPI transaction.

Is There Any Limit on Monthly Free UPI Transactions?

Individuals will not have any monthly limit or usage charge for free UPI transactions. However, banks and NPCI may fix daily limits on UPI transactions.

These daily limits are not charges. If you reach your daily transaction limit, it simply means you may have to wait until the limit resets before making another transaction.

Will All Shops Have to Pay MDR?

Not at all. The new set of MDR guidelines will not apply to every merchant transaction.

Eligible small merchants, such as street vendors and local shops, earning up to ₹1 lakh per month via UPI QR codes through the P2PM category, will be able to retain zero MDR on their transactions.

This helps protect small businesses from additional payment costs.

What Happens to Payments for Fuel, Railways and Other Essential Services?

Some essential and low-profit sectors have a separate MDR rule. For specific transactions over ₹2,000, a fixed ₹5 MDR will be applicable for categories such as:

• Railways
• Telecommunications
• Insurance
• Fuel
• Agricultural inputs

This separate rate is designed to provide a fixed payment cost for these sectors.

What About Mutual Funds and Stock Market Transactions?

Transactions related to mutual funds, securities, stock brokers, and dealers will have a different MDR.

• MDR: 0.02%
• Maximum MDR: ₹300 per transaction

This rate differs from the 0.4% MDR that applies to specific merchant transactions exceeding ₹2,000.

How Many Merchant UPI Payments Will Actually Be Affected?

The new framework will not have an effect on most merchant transactions. As per the given data, the MDR is likely to affect just about 4% of merchant transactions.

This means approximately 96% of merchant transactions will remain unaffected because they are either below ₹2,000 or covered by the zero-MDR framework for eligible small merchants.

In simple terms:

• 96% of merchant transactions: Expected to stay the same
• Around 4%: Expected to come under MDR
• Payments up to ₹2,000: Free of MDR
• Eligible small merchants: Zero MDR

What Is the Purpose of the New UPI System?

The framework has been introduced under the Payment and Settlement Systems Act, 2007, following discussions by the UPI Steering Committee.

The main aim is to support the long-term growth and sustainability of UPI while keeping payments free for individuals and protecting small merchants.

The money collected through applicable MDR transactions will be shared among payment system participants, including banks, payment service providers, and UPI application providers.

It can also support the improvement and expansion of UPI payment infrastructure, including in rural and semi-urban areas.

How Will Small Merchants Get More Support?

The scheme also consists of an exclusive fund that will motivate more small businesses to use UPI. An amount equal to 5% of the total MDR collected will be contributed to this fund.

The fund will help with:

• Increasing UPI acceptance among small businesses
• Supporting continued digital payment usage
• Bringing more small businesses into India's digital payment system
• Expanding UPI usage among merchants

What Will the New UPI Model Mean for You?

• Sending money to another person: Free
• Receiving money: Free
• Paying a store up to ₹2,000: MDR free
• Eligible small merchants: Zero MDR
• Merchant payments exceeding ₹2,000: MDR can apply
• Customers: Not supposed to pay MDR
• Monthly UPI usage: No new monthly quota
• Most merchant payments: Expected to remain unaffected

Final Takeaway

The new UPI framework does not mean that people will have to pay a fee every time they use UPI. P2P payments will remain free, and merchant payments up to ₹2,000 will remain free of MDR.

Certain merchant transactions above ₹2,000 will come under the MDR framework, but the MDR is a charge within the payment system and is not supposed to be passed on to customers.

With approximately 96% of merchant transactions expected to remain unaffected, the framework aims to introduce a limited MDR structure while continuing to support everyday UPI payments and small merchants.