From Zero-MDR to 0.4%: The Policy U-Turn Behind India’s UPI Story

India’s UPI growth story was built partly on a simple proposition: sending money or paying a merchant through UPI did not carry a transaction fee for users. From January 2020, the government also mandated zero Merchant Discount Rate, or MDR, for UPI merchant payments.

That model helped UPI reach enormous scale. Now, the policy is changing. From October 15, 2026, specified merchant transactions above Rs. 2,000 will attract a 0.4% MDR. Consumers will still not pay a transaction charge, and the government says around 96% of merchant transactions will remain unaffected. 

How Did UPI Grow From 2016 to 2026?

UPI apps grew by combining instant bank-to-bank payments. This is a model which is easy and work on a low-cost payment experience within a single system.

1. UPI Started With 21 Banks

NPCI launched the UPI pilot in April 2016, and the system went live for customers in August with 21 banks. Instead of requiring bank account details for every payment, users could send and receive money through identifiers such as a Virtual Payment Address. 

2. Zero MDR Changed the Economics

From January 2020, MDR was made zero for BHIM-UPI and RuPay debit card transactions. This was done through changes to the Payments and Settlement Systems Act and Income-tax Act. This meant merchants did not have to pay the usual percentage-based processing charge for accepting UPI. 

3. Transaction Volumes Exploded

The combination of QR-based payments and widespread smartphones makes it friendly. The zero MDR helped UPI move far beyond peer-to-peer transfers.

The below table shows the changes in the 2026. 

Source: NPCI

By August 2026, 752 banks were live on UPI, compared with just 21 when the system initially went live. 

Why Was UPI Free Since 2020?

UPI was kept free primarily to accelerate digital payments and make acceptance attractive for merchants.

MDR is normally one way payment infrastructure providers recover the cost of processing transactions. With zero MDR, that direct merchant-funded revenue stream disappeared for UPI transactions. 

The government instead used incentive schemes to support participants in the payment ecosystem.

For FY2024-25, the Cabinet approved another Rs. 1,500 crore incentive scheme covering low-value BHIM-UPI P2M transactions. Eligible transactions of up to Rs. 2,000 to small merchants received a 0.15% incentive.

So, zero MDR did not mean running UPI had zero cost. Banks, payment service providers and apps still had technology, fraud management, infrastructure and processing expenses.

How Did the Government Subsidy Model Work?

The subsidy model effectively shifted part of the cost of maintaining zero-MDR payments away from merchants.

Government incentives were paid to the acquiring bank, which could then share them among ecosystem participants such as the issuer bank, payment service provider bank and third-party app providers. 

This helped preserve free merchant acceptance while UPI was expanding. However, the amount of transactions being processed grew far faster than in UPI’s early years.

For perspective, UPI transaction value rose from Rs. 21.3 lakh crore in FY2019-20 to Rs. 213.8 lakh crore by January of FY2024-25. P2M payments alone had reached Rs. 59.3 lakh crore by then. 

What Changes With the New 0.4% UPI MDR?

The new framework moves UPI from universal zero MDR toward a more targeted model.

From October 15, 2026, a 0.4% MDR will apply to specified merchant transactions above Rs. 2,000. The government has clarified that consumers will not be charged and all person-to-person transfers will remain free. Around 96% of P2M transactions are expected to remain unaffected. 

The difference can be understood simply:

MDR is paid within the merchant payment ecosystem. It is not a government tax or a fee collected by NPCI. The amount is distributed among payment participants, including banks and payment app providers.

How Does NPCI and the UPI Ecosystem Make Money?

NPCI operates payment infrastructure rather than functioning like a consumer UPI app. Its wider network includes systems such as UPI, RuPay, IMPS, NACH, AePS and FASTag. 

UPI transactions also involve multiple participants. A typical merchant payment can include the customer’s bank, merchant’s acquiring bank, payment service provider and the app through which the transaction is initiated.

Under zero MDR, direct transaction economics were constrained and government incentives supported parts of this ecosystem. The new MDR framework creates a direct revenue pool from eligible higher-value merchant transactions, reducing complete dependence on the earlier zero-fee model.

Why Is the 0.4% MDR Change Important?

The change marks a shift in the policy objective behind UPI.

The first phase focused heavily on adoption. Making payments inexpensive helped consumers and merchants become comfortable with QR codes and instant bank transfers.

The next challenge is sustaining a system processing tens of billions of transactions every month. The government says the new framework is intended to support UPI’s long-term sustainability, technological development and resilience while continuing to protect consumers and smaller merchants. 

The history of UPI MDR in India therefore reflects two different stages of the same payment system: first building scale through zero MDR, and now introducing selective monetization after that scale has been established.

Conclusion

India’s UPI growth story shows how policy, technology and payment infrastructure can work together to change everyday financial behavior. UPI started with 21 banks in 2016. But now processes more than 24 billion transactions in a single month.

The move from zero MDR to a selective 0.4% MDR does not make UPI a paid service for consumers. Instead, it changes how certain higher-value merchant transactions help fund the payment ecosystem.

For investors, developments like these are also important because changes in payment economics can affect banks, fintech companies and the wider digital financial ecosystem. Keep following Rupeezy for simple explanations of market, policy and investing developments that can affect your financial decisions.

FAQs

1. Why Was UPI Made Free in 2020?

Zero MDR was introduced to promote digital transactions. This helped to encourage merchants to accept UPI without paying a processing fee.

2. Is UPI No Longer Free in India?

UPI remains free for consumers and person-to-person transfers. The new MDR applies only to specified merchant transactions above Rs. 2,000.

3. What Is the New UPI MDR Rate?

The new framework introduces a 0.4% MDR on specified eligible merchant payments above Rs. 2,000 from October 15, 2026. 

4. How Many UPI Transactions Does India Process?

NPCI recorded 24.51 billion UPI transactions worth approximately Rs. 29.82 lakh crore in August 2026. 

5. Did the Government Subsidize Free UPI Payments?

Yes. Government incentive schemes supported eligible UPI transactions. For example, BHIM-UPI received Rs. 3,268 crore of incentive payouts in FY2023-24, while a Rs. 1,500 crore scheme was approved for low-value P2M transactions for FY2024-25.