RBI and NPCI Weigh 0.4% MDR on Merchant UPI Payments Above Rs 2,000

The Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI) have initiated active consultations with banks and payment aggregators to introduce a proposed 0.4% charge on high-value merchant Unified Payments Interface (UPI) transactions exceeding Rs 2,000.

The move follows recent legislative groundwork by the central government to ensure the long-term sustainability, cybersecurity, and technological readiness of the world's largest real-time digital payments architecture.

Framework of the Proposed Structure

Under the proposed pricing model being discussed by the UPI and Services Steering Committee, the 0.4% fee will function as a Merchant Discount Rate (MDR) applied strictly to peer-to-merchant (P2M) transactions above Rs 2,000. Peer-to-peer (P2P) transfers between individuals will remain completely free of cost regardless of ticket size.

The Ministry of Finance had issued a formal gazette notification under the Payment and Settlement Systems Act, 2007, mandating that banks and system providers cannot impose direct or indirect fees on UPI or RuPay debit card transactions valued at or below Rs 2,000.

Indicative Charges Under the 0.4% Proposal:

• A Rs 5,000 merchant transaction would attract an indicative fee of Rs 20.
• A Rs 10,000 transaction would incur an MDR of Rs 40.
• A high-value purchase of Rs 50,000 would attract an aggregate charge of Rs 200.

Revenue Distribution Across the Fintech Ecosystem

According to regulatory sources involved in the consultations, the framework includes a potential revenue-sharing mechanism to incentivize participating financial institutions and payment gateway providers.

Proposed Fee Distribution Matrix:

• Banks: Expected to receive approximately 40% of the fee pool to offset backend processing, fraud monitoring, and core banking infrastructure upgrades.
• Payment Applications: Front-end platforms such as PhonePe, Google Pay, and Paytm are slated to receive 30%.
• Merchant Payment Service Providers: Aggregators and acquiring firms that deploy merchant QR terminals and soundboxes would receive the remaining 30%.

Drive for Self-Sustainability

The proposed levy reflects international benchmarks for national instant payment rails. Brazil's PIX operates at an average merchant charge of around 0.33%, while China's domestic payment systems levy roughly 0.40%.

India’s UPI ecosystem has expanded exponentially, processing 2,366 crore transactions valued at Rs 29.9 lakh crore in July 2026 alone. Following Parliament’s amendments to Section 10A of the Payment and Settlement Systems Act in August 2026, the Centre highlighted that recurring technological improvements, server capacities, and anti-fraud mechanisms cannot remain permanently reliant on budgetary subsidies.

While the proposal is still in stakeholder consultations and awaits finalization by the NPCI steering committee, the introduction of an MDR on large commercial transactions is expected to significantly improve unit economics for domestic payment companies and commercial lenders.

Tags: Reserve Bank of India NPCI Ministry of Finance PhonePe Google Pay Banking Sector