When Finance Minister Nirmala Sitharaman first addressed the controversy around UPI charges in August 2026, her message was clear: any Merchant Discount Rate (MDR) would apply to merchants, not to consumers.
Now, the charge has been announced. From October 15, 2026, a 0.4% MDR will apply to specified person-to-merchant (P2M) UPI transactions above ₹2,000.
MDR is the fee charged within the digital payments ecosystem for processing a merchant transaction. It is not a tax collected by the government.
Person-to-person UPI payments will remain free regardless of the amount, while merchant transactions up to ₹2,000 will also remain free. For eligible transactions above ₹75,000, the MDR will be capped at ₹300.
Small merchants receiving up to ₹1 lakh a month through QR-code transactions will be exempt. The government has said around 96% of P2M transactions will remain unaffected.
The MDR will be distributed among participants in the payment ecosystem, including banks, payment apps and other service providers. The government has also barred the payment ecosystem from passing the MDR directly on to consumers.
But if merchants are officially expected to bear the cost, will they actually absorb it? Or could the new charge eventually find its way back to consumers, directly or indirectly?
Nehru Place traders are already worried
Delhi’s Nehru Place, one of India’s biggest electronics markets, offers an early look at that dilemma.
The Indian Express spoke to traders there after the new MDR was announced. Many said they could not simply add the cost to customers’ bills because buyers in the market negotiate over prices and can easily walk into another shop.
One laptop repair shop owner put it bluntly: “We don’t see any other option but to silently accept that our margins are going to take a hit.”
He added, “Ninety-nine per cent of our customers pay via UPI, and I can’t ask them to pay more to cover for the MDR, as they will simply walk away to another shop.”
At another computer-peripherals shop, the owner described UPI as a “hook”, arguing that merchants had spent years adapting to a payment system with no MDR, and that customers now expect it everywhere.
Another shopkeeper predicted, “Differential pricing for payment in cash and UPI will make a comeback.”
The concern is not limited to individual traders. The Retailers Association of India said the 0.4% MDR “could undo years of progress” in getting small shopkeepers to adopt digital payments.
Its CEO, Kumar Rajagopalan, warned, “During the festive season, a large share of transactions cross the Rs 2,000 mark, and the moment a fee attaches itself to digital payment, cash becomes the path of least resistance.”
The All Delhi Computer Traders Association has also demanded a rollback. Its general secretary Saran Singh said traders were already dealing with economic pressures, while senior vice-president KS Oswal said the additional charge could deepen those difficulties. ADCTA president Mahinder Aggarwal called on the government to reconsider the decision.
So, while the government has decided who is supposed to pay MDR, the question is whether businesses can realistically absorb it.
Most merchants were not willing to absorb MDR
A LocalCircles survey conducted before the final 0.4% rate was announced gives some indication of how merchants were thinking about the cost.
The survey received 32,796 responses from businesses and merchants across 242 districts. When asked how much MDR they would be willing to bear on UPI payments above ₹2,000, 41% said they would not bear any MDR at all. Another 9% said they did not accept UPI payments.
Only 17% said they were willing to bear an MDR of 0.3% or higher. The largest group among those willing to pay something, 15%, would tolerate only 0.04%.
There is an important caveat. The survey was conducted when a 0.3% MDR was being discussed, before the final 0.4% rate was announced. So it cannot tell us exactly what merchants will do from October 15.
But it does show that a large share of merchants were already reluctant to absorb even a smaller MDR.
Passing on the cost does not necessarily mean adding a UPI fee
The government has been clear that merchants should not simply add the MDR to the customer’s bill.
The Finance Ministry has advised banks to ensure merchants do not pass the cost on to consumers, while UPI application providers are expressly prohibited from imposing platform fees or hidden charges. The National Payments Corporation of India (NPCI) has also said consumers will continue to pay the listed price.
But there is a difference between directly charging the customer for MDR and responding to a new business cost.
A merchant could encourage customers to use cash. A shop could stop accepting certain UPI-linked payment options. A business could try to negotiate prices differently. Or a merchant could simply absorb the cost as part of its operating expenses.
That is why the real question may not be whether merchants are allowed to pass MDR on to customers. They are not.
It is what merchants do when they do not want to absorb it.
Social media is already imagining that confrontation
One X (formerly Twitter) user, Mr Tubun, shared a humorous take, imagining a customer being told that choosing UPI for a ₹10,000 purchase would mean paying an additional MDR charge, leading to a confrontation over who should bear the cost.
The satire is not evidence of how merchants will behave nationally, but it captures the very dispute the new framework is trying to prevent.
Another user described an experience involving a ₹17,000 purchase, “i bought an invertor battery and the shopkeeper refused to accept credit card saying charges. then when i paid through upi again he said pay mdr charges of 480rs on a 17k battery. pathetic. i guess its back to cash then. but the quality of notes is pathetic too.”
Another reply argued from the merchant’s side, “As a guy in service industry, no sensible businessman will pay more tax from out of his pockets…… consumers were already paying tax now pay even more”
These are individual experiences and opinions, not representative evidence of how merchants across India will respond. But they show that customers and merchants are already familiar with arguments over who should bear payment-processing costs.
Read more: Why Are Bengaluru Shopkeepers Saying No To UPI And Digital Payments, Only Taking Cash
Reddit’s merchant debate is more revealing
Reddit discussions around the new MDR are also less about the formal rule and more about what merchants might actually do.
In r/indianeconomy, one commenter identifying themselves as a merchant wrote, “As a merchant, I declare all the charges will be forwarded to customers, direct or indirect, for my shop.”
Another user responded, “As a customer, I will find another shop.”
That exchange gets to the central problem. If merchants cannot absorb the cost but also cannot directly charge MDR, customer behaviour becomes part of the equation.
A separate discussion on r/CreditCardsIndia raised another possibility. Merchants could switch from merchant QR codes to personal QR codes because P2P UPI remains free.
One commenter wrote, “Will rising MDR push merchants back to personal QR codes, killing RuPay CC on UPI?”
Another user said this already happens and explained why they would still not return to cash, “UPI is too convenient + I get a readymade record of what and where I’m spending.”
The same thread also contained a more direct possibility from another commenter, “My best guess is they’ll ask customers to bear the MDR, just like many do for credit cards. So it’ll be like, here, your bill is 2k if you pay cash and 0.4% extra if you pay by upi.”
These are individual Reddit opinions, not representative evidence. But together they show three possible merchant responses: absorb the cost, change the payment method being accepted, or try to make customers bear the additional cost.
The last option, however, would conflict with the government’s stated rules.
Existing card payments offer a clue
Another Reddit discussion on r/IndiaFinance provides a useful comparison with RuPay credit-card payments on UPI.
One user said they had previously spent ₹15,000–₹20,000 a month through RuPay credit-card QR payments but had noticed more small merchants disabling credit-card payments. The user said a merchant had explained that higher MDR was the reason.
The commenter concluded, “If merchants have to absorb that cost, many will simply disable the option rather than take the hit.”
That does not mean ordinary bank-account UPI will follow the same pattern. The new framework treats regular UPI differently from credit-card-on-UPI transactions.
But it demonstrates that a merchant-side payment cost does not always result in a customer surcharge. Sometimes it changes which payment methods the merchant is willing to accept.
Not every merchant may pass it on
There is also another side to the story.
The Times of India reported that consumers may see limited direct impact because some larger retailers, online platforms and restaurants could choose to absorb the MDR rather than risk creating friction at checkout.
That makes sense particularly for businesses where losing a customer over a small payment charge could cost more than absorbing the fee.
For a large retailer, 0.4% may become another operating expense. For a small trader working with thin margins, the same percentage may feel very different.
Cash also comes with its own handling and deposit costs, meaning switching customers back to cash is not automatically a cost-free solution.
So merchants do not have one obvious response available to them.
Ashneer Grover calls UPI MDR another tax
Entrepreneur Ashneer Grover has also questioned the new charge.
In a September 16 post on X, Grover questioned why a levy was needed when the RBI, banks and NPCI already generate substantial surpluses and profits, and framed the new UPI charge as another form of tax collection.
Grover’s post is an argument about the rationale behind the charge, rather than evidence that consumers will definitely end up paying it.
The government’s position is that the MDR is intended to create a sustainable revenue model for the UPI ecosystem and fund investment in infrastructure, cybersecurity, fraud prevention and reliability.
So, will merchants not pass the UPI charge on to consumers?
The formal answer is clear.
The MDR is a merchant-side charge. Consumers are not supposed to be charged it directly, and banks have been advised to ensure merchants do not transfer the cost to customers.
But what happens indirectly is harder to predict.
Nehru Place traders are already saying that thin margins make absorption difficult. The LocalCircles survey shows that many merchants were reluctant to bear even a 0.3% charge.
Retailers are warning about a possible shift towards cash, while online discussions are already considering changes in QR usage and payment acceptance.
At the same time, some businesses may simply absorb the MDR because keeping UPI frictionless is more valuable than recovering 0.4% from each transaction.
The new framework begins on October 15.
The government has decided who should bear the charge. The more complicated question is what merchants will actually do once they have to start paying it.
Image Credits: Google Images
Sources: The Times of India, The Indian Express, Moneycontrol
Find the blogger: @diptisadh
This post is tagged under: UPI, UPI charges, UPI MDR, merchant discount rate, UPI payment charges, NPCI, digital payments, online payments, merchants, consumers, UPI 2026, India finance, personal finance, payment apps
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