Context
- Recently, the National Payments Corporation of India (NPCI) has introduced a 0.4% Merchant Discount Rate (MDR) on UPI Person-to-Merchant (P2M) transactions above ₹2,000.
What is Merchant Discount Rate (MDR)?
- MDR is a fee charged to merchants (not customers) by banks/payment providers for processing digital payments.
- It is generally deducted from the amount credited to the merchant rather than being added to the customer’s bill.
- MDR is neither a tax nor a charge collected by the Government or NPCI.
- It is distributed among payment ecosystem participants, including banks and payment application providers, to support the operation and continued expansion of the UPI ecosystem.
What Remains Completely Free
- All Person-to-Person (P2P) transactions – 100% free, regardless of amount; no transaction fee or platform fee allowed.
- P2P transactions constitute 70% of total UPI transaction value.
- Person-to-Merchant (P2M) transactions up to ₹2,000 – remain free for customers.
- Person-to-Person-Merchant (P2PM) category: Small merchants/street vendors receiving up to ₹1 lakh/month via UPI QR codes – zero MDR.
- Overall, ~96% of all merchant (P2M) transactions remain unaffected by MDR.
MDR Structure under the New UPI Framework
| Transaction Type / Slab | MDR Applicable |
| Mid-value (₹2,001 – ₹74,999) | 0.40% of value |
| High-value (≥ ₹75,000) | ₹300 flat cap |
| Essential Services (Rail, Fuel, Utilities, Telecom, Insurance, Taxes) | ₹5 flat |
| Capital Markets (Mutual Funds, Securities, Stock Brokers) | 0.02% |
| Important Current to Concept (CTC) from this article for UPSC Merchant Discount Rate (MDR) |
Q. With reference to the revised Merchant Discount Rate (MDR) framework for UPI payments, consider the following statements:
1. All Person-to-Person (P2P) transfers remain completely exempt from MDR charges regardless of value.
2. A small merchant under the P2PM category is migrated to the taxable P2M status if their collections exceed ₹1 lakh in any single month.
3. Recurring Systematic Investment Plan (SIP) payments made via UPI Autopay carry a flat MDR fee of 0.02%.
4. Payments above ₹2,000 account for less than 5% of total UPI merchant volume but constitute nearly two-thirds of total P2M transaction value.
Which of the statements given above are correct?
(a) 1 and 4 only
(b) 2 and 3 only
(c) 1, 2, and 4 only
(d) 1, 2, 3, and 4
Answer: (a) 1 and 4 only
Explanation:
• Statement 1 is correct: P2P transfers between individuals carry zero MDR, without any transaction volume or value caps.
• Statement 2 is incorrect: Migration from P2PM to P2M status is triggered only when a merchant crosses the ₹1 lakh/month threshold for three consecutive months.
• Statement 3 is incorrect: SIPs and recurring standing instructions set on UPI Autopay carry no fee at all (0% MDR). The 0.02% rate applies to direct capital market/broker payments, not recurring SIPs.
• Statement 4 is correct: Transactions above ₹2,000 represent only 4% of overall P2M transaction volume, but account for two-thirds of total P2M monetary value.