In whose pocket will the 0.4% MDR money on UPI go? Finance Minister Nirmala Sitharaman cleared the picture, know the impact on the general public

In whose pocket will the 0.4% MDR money on UPI go? Finance Minister Nirmala Sitharaman cleared the picture, know the impact on the general public

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Finance Minister Nirmala Sitharaman has given a big statement regarding the 0.4% Merchant Discount Rate (MDR) to be applicable on select UPI transactions of more than ₹2,000 from October 15, 2026. Know whether this fee will go to the government treasury or to banks and fintech companies, and what is its complete formula of 40:30:20:10.

New Delhi. For the last few days, there has been a huge debate on Merchant Discount Rate (MDR) regarding India’s Unified Payments Interface (UPI), which has set an example across the world in the field of digital transactions. There was confusion on social media and political circles after the National Payments Corporation of India (NPCI) issued a circular imposing 0.4 per cent MDR on select person-to-merchant (P2M) payments above ₹2,000 from October 15, 2026. Many opposition parties termed this as a new indirect tax on the public and a decision taken under external pressure. Putting an end to this entire controversy, Union Finance Minister Nirmala Sitharaman has clarified the situation in clear words. The Finance Minister bluntly said that this is not a government tax, cess or surcharge and not a single penny of it will go to the Consolidated Fund of India. This is a purely professional decision taken by the payment participants to ensure the long-term sustainability of the technical maintenance, cyber security and server capacity of the digital payments ecosystem.

Finance Minister Nirmala Sitharaman clarified that every penny of MDR collected will be divided among the financial and technical institutions that provide their services in running the UPI network 24 hours without interruption. Till now, due to the zero-fee regime (Zero MDR), banks and fintech companies had to bear the burden of huge expenditure on infrastructure. Under the new arrangement, the amount coming from 0.4 percent MDR will be distributed as follows:

• 40% share to the customer’s bank (Remitter Bank): The largest share of 40 percent will be given to the bank in which the customer making the transaction has an account. Banks have to upgrade the Core Banking Solution (CBS) and huge server infrastructure to process millions of transactions every second, for which this income will be the primary enabler.

• 30% share to payment gateways and aggregators: 30 percent of the amount will go to payment gateway companies that create a secure technical bridge between the merchant’s bank account and the digital network and operate anti-fraud tools.

• 20% share to UPI application: Front-end UPI apps like PhonePe, Google Pay, Paytm or BHIM will get 20 per cent share. This will help these fintech companies to remain financially strong in their software development, user interface and customer support system.

• 10% share to sponsoring bank: The remaining 10 percent will go to the sponsoring bank which takes legal and financial guarantee of the settlement by connecting the UPI app to the banking grid and NPCI switch.

• Special fund of 5% for small traders: Additionally, 5 percent of the total MDR collection will go into a dedicated fund, which will be used to deploy QR codes among rural and small town traders, increase digital literacy and encourage small businesses.

Talking to news agency PTI, Finance Minister Nirmala Sitharaman rejected the opposition’s allegations that the government has given permission to impose charges on UPI due to pressure from America or foreign financial institutions. The Finance Minister said, “This allegation is completely baseless and factless. I completely refute it. The opposition is just trying to find an issue without understanding the issue.” He reiterated that instead of imposing any mandate, the government has given autonomy to various parties in the payments system—NPCI, payment banks, merchant banks and fintech firms—to work together to decide on a workable and self-sustaining revenue structure. He reminded that merchants already pay 1 to 2 per cent MDR on credit card and debit card swipes, while the proposed 0.4 per cent rate on UPI is nominal compared to global standards.

Rejecting the rumors being spread about the impact of this new rule on common citizens and small shopkeepers, the government and NPCI have issued clear guidelines:

• Zero Fees on P2P Transfers: There will be no charge for sending money from one person to another person’s account (Person-to-Person). Whether you send ₹100 or ₹50,000 to your friend, family or any acquaintance, this service will be completely free.

• All merchant payments below ₹2,000 free: Any QR code payment up to ₹2,000 for everyday purchases like vegetables, milk, tea, breakfast, auto hire or ration will be at zero MDR.

• 96% small traders completely safe: Under NPCI rules, small traders who do digital business up to ₹ 1 lakh through UPI QR in a month will be 100% exempted from this fee. About 96 percent of the total merchant transactions in India fall under this category.

• Strict ban on recovery from customers: The Finance Ministry and banks have given strict instructions that only big merchants will bear the expenses of MDR. If a merchant tries to charge extra money from a customer for making QR payment, then legal and banking restrictions may be imposed on his merchant account.

To ensure that there is no additional financial burden on the daily basic needs of the general public, special categories have been defined in the revised framework of NPCI:

• Railways, Fuel and Insurance: In essential sectors like railway ticket booking, fuel at petrol pumps, telecom recharge and insurance premium, a flat token charge of only ₹5 has been fixed instead of 0.4% on payments above ₹2,000.

• Capital Markets and Mutual Funds: A nominal rate of only 0.02 per cent will be applicable on transactions related to share broking and mutual fund investments, with a maximum cap of ₹300.

• Maximum Fee Cap: Even for large transactions (₹75,000 or more), the maximum MDR that can be imposed on any merchant will not be more than ₹300.

This system, which will be implemented from October 15, 2026, has been brought with the aim of strengthening India’s digital public infrastructure, eliminating the problems of server down and making cyber security impenetrable, so that the country’s digital transactions can become more secure and sustainable in the future.