A proposed 0.4 per cent MDR on UPI merchant payments above Rs 2,000 could push consumers towards cards, cash and bank transfers, LocalCircles estimates
Unified Payments Interface (UPI) transaction value could decline by around 10 per cent and transaction volumes by 4 per cent once a 0.4 per cent merchant discount rate (MDR) on person-to-merchant payments above Rs 2,000 takes effect from 15 October, potentially shifting a portion of higher-value payments to cash, cards and bank transfers.
According to Sachin Taparia, CEO, LocalCircles, the estimates are based on separate surveys of merchants and consumers conducted ahead of the proposed rollout. Payments above Rs 2,000 accounted for about 4 per cent of merchant UPI transactions in August but represented 67 per cent of merchant payment value, or around Rs 6 lakh crore a month.
The consumer survey, released by LocalCircles on October 2, found that 76 per cent of respondents expected to shift larger payments to cards, cash or bank transfers if using UPI involved an additional cost. Only 14 per cent said they would continue using UPI and bear the additional amount if a merchant passed the MDR on to them.
UPI processed 24.51 billion transactions worth Rs 29.82 lakh crore in August 2026. Merchant payments accounted for 15.51 billion transactions worth Rs 8.95 lakh crore, making higher-value merchant transactions an important part of the overall payment value despite their relatively small share of transaction volumes.
Higher-value Payments Emerge As Pressure Point
LocalCircles estimates that payments above Rs 2,000 account for about one-fifth of overall UPI transaction value. It expects the value impact to be larger than the volume impact because the transactions subject to the MDR are concentrated at the higher end of the merchant payment spectrum.
The survey estimates a 10 per cent decline in UPI value in the first full month after the MDR takes effect. The projected 4 per cent decline in volumes includes an estimated 1 per cent direct impact from affected transactions and another 3 per cent attributed to a broader network effect, as consumers alter their payment behaviour at merchants where an additional charge is imposed.
The MDR is a fee paid by merchants to banks and payment companies for processing digital payments. Under the new framework, the 0.4 per cent charge will apply to person-to-merchant UPI payments above Rs 2,000 from October 15.
The government had on 14 September retained zero charges on UPI merchant payments up to Rs 2,000 and RuPay debit card transactions. Small merchants receiving up to Rs 1 lakh a month through UPI QR codes will also be exempt from the proposed MDR.
Consumers Could Shift Larger Payments To Cards, Cash
The potential change in payment preferences becomes clearer when consumers are asked specifically about a merchant passing the MDR on to them. In the LocalCircles survey, 27 per cent of respondents said they would switch to cash if a merchant added a fee to a UPI payment above Rs 2,000, while 26 per cent would use a credit card. Another 14 per cent would opt for a debit card and 4 per cent would use bank transfer, NEFT or IMPS.
For future purchases above Rs 2,000, credit cards and cash each accounted for 26 per cent of respondents’ preferred payment modes. Debit cards accounted for 13 per cent and bank transfers for 11 per cent, while only 20 per cent said UPI would remain their most-used mode if an additional cost were imposed.
The government has maintained that consumers should not bear the MDR. Finance Minister Nirmala Sitharaman said in September that the responsibility for the charge does not lie with customers. The government is working with the Indian Banks’ Association on a mechanism for banks to monitor merchants and ensure that the charge is not passed on.
Merchants Show Limited Willingness To Absorb MDR
Merchant responses indicate another challenge for the proposed framework. Of 32,796 merchants surveyed by LocalCircles, 41 per cent said they would not bear any MDR on UPI payments above Rs 2,000, while 9 per cent said they did not accept UPI payments. Only 17 per cent said they would be willing to absorb an MDR of 0.4 per cent or more. Another 15 per cent said the maximum MDR they would accept was 0.04 per cent.
Merchants unwilling to absorb the charge could instead adjust prices, add a surcharge or encourage customers to use cash, cards or bank transfers, according to LocalCircles.
Small merchants receiving up to Rs 1 lakh a month through UPI QR codes will be exempt from the MDR. The survey estimates that around 96 per cent of merchant UPI transactions will remain unaffected by the framework.
New MDR Framework Follows Years Of Zero Charges
The proposed MDR marks a shift from the zero-MDR regime that has supported UPI’s expansion since its introduction. Parliament amended Section 10A of the Payment and Settlement Systems Act, 2007, in August, removing the blanket prohibition on charges for RuPay debit card and UPI transactions and allowing the Centre to specify which payment modes would remain free.
The government has also highlighted the cost of supporting the UPI ecosystem. Incentives for UPI transactions peaked at Rs 3,631 crore in FY2023-24, compared with Rs 2,000 crore allocated for FY2026-27. The Department of Financial Services has told a parliamentary panel that maintaining zero MDR may not be financially sustainable over the long term.
Under the new framework, payments up to Rs 2,000 will remain free, as will person-to-person UPI transfers. MDR will be capped at Rs 300 for transactions of Rs 75,000 and above. Railways, telecom, insurance, fuel and farm-input payments will attract a flat Rs 5 charge, while capital-market payments will carry a 0.02 per cent MDR.
Trader Bodies Oppose Proposed Charge
The proposed MDR has also drawn opposition from trader organisations, which have warned that merchants could split bills, move customers towards bank transfers or adjust prices to offset the additional cost. The Confederation of All India Traders has opposed the measure, while the Chamber of Trade and Industry has sought its rollback. A CAIT-led delegation met the Finance Minister on September 30, following which a proposed “No UPI Day” protest was withdrawn.
LocalCircles has suggested initially applying the 0.4 per cent MDR on payments above Rs 2,000 involving large corporate merchants while keeping MSMEs outside the framework. It estimates that this approach could generate about 98 per cent of the potential MDR revenue while limiting disruption for smaller merchants.
