The new merchant discount rate(MDR) on specified UPI transactions is set to create a new revenue stream for the digital payments ecosystem, with the money collected from merchants to be divided among banks, payment gateways, UPI apps and sponsoring banks.
Finance Minister Nirmala Sitharaman has issued a clear update regarding the new 0.4% Merchant Discount Rate (MDR) on select UPI payments. The Minister clarified that not a single rupee from this charge goes to the government coffers. Instead, the fee will be distributed within the digital payments ecosystem to support IT infrastructure, server costs, and cybersecurity. The new rule applies only to person-to-merchant (P2M) transactions over ₹2,000 starting from October 15, 2026. Standard personal money transfers (P2P) and small shopkeeper payments under ₹2,000 remain completely free.
Customer Bank, the bank holding the customer account gets the largest chunk to cover network processing. Payment Gateway, goes to the entity that processes the merchant’s machine or QR payment setup. UPI App (20%), paid to application providers like PhonePe, Google Pay, or Paytm for maintaining app interface and security. Sponsoring Bank (10%), allocated to the sponsor bank connected to the UPI app.
For example, on an eligible transaction of ₹10,000, the total fee is ₹40. Out of this, the customer’s bank receives ₹16, the gateway gets ₹12, the UPI app gets ₹8, and the sponsoring bank receives ₹4. The government reiterated that consumers will not pay anything extra, as merchants are strictly instructed not to pass this cost on to shoppers.
