LOnly 14% Indians surveyed likely to continue using UPI for payments above INR 2,000 if merchant passes on the MDR fee to them; Others to use alternate modes with no/lower fee

October 02, 2026, New Delhi: In two weeks, paying by UPI at a shop will no longer be free for every merchant. From October 15, 2026, a merchant discount rate (MDR) of 0.4% will apply to person-to-merchant (P2M) UPI payments above INR 2,000. It ends more than six and a half years of zero MDR on UPI. The question now is who will finally bear this cost at the counter.

The change was set in motion on September 14, 2026. The Ministry of Finance issued a gazette notification, S.O. 5067(E), listing the payment modes that stay protected from charges. These are RuPay debit cards and UPI payments of up to INR 2,000. A day later, a Press Information Bureau (PIB) release and an NPCI circular set out the rates decided by the NPCI-chaired UPI and Services Steering Committee. Under the framework, the MDR is capped at INR 300 per transaction for payments of INR 75,000 and above. A flat INR 5 per transaction applies to essential sectors such as railways, telecom, insurance, fuel and farm inputs. Capital market payments attract 0.02%. Person-to-person transfers remain free. Small merchants receiving up to INR 1 lakh a month through UPI QR codes are exempt. The government says around 96% of merchant transactions will not be affected.

The legal basis came in August 2026. Parliament amended Section 10A of the Payment and Settlement Systems Act, 2007, through the Taxation and Other Laws (Amendment) Bill, 2026. The amendment removed the blanket ban on charges for RuPay debit card and UPI payments, in place since January 2020. It now lets the Centre notify which payment modes stay free. The Bill received presidential assent on August 17, 2026.

The government has been clear that consumers are not the target. The Ministry of Finance has said MDR "is neither a tax nor a charge collected by Government or NPCI". It is shared among banks, payment service providers and UPI apps to run and expand the network. Banks have been directed to ensure merchants do not pass the charge on to customers. UPI apps are barred from levying platform fees or hidden charges. Finance ministry officials have said they will monitor on a daily basis from October 15 whether merchants are passing the MDR on to consumers. On September 22, Finance Minister Nirmala Sitharaman said "the responsibility does not lie with the customer" and that the MDR would not be transferred to consumers. The Ministry is also working with the Indian Banks' Association (IBA) on a mechanism for banks to monitor merchants and ensure the charge is not passed on. The IBA is also set to run an awareness campaign in regional languages telling consumers they are not required to pay any extra charge on UPI.

However, beyond monitoring, the framework does not yet spell out penalties or a refund route for a consumer who is wrongly charged. That gap matters. For years, schools, ticketing portals, utility billers and fuel outlets have added card costs to bills as a "convenience fee" or "service charge". With a 0.4% MDR, a merchant pays INR 20 on a INR 5,000 sale and INR 200 on a INR 50,000 sale. An 18% GST is also levied on the MDR, though merchants can claim input tax credit. Government sources have said the matter will be put up to the GST Council. Many will be tempted to recover it.

The case for the MDR rests on the cost of running the network. Government incentives for UPI peaked at INR 3,631 crore in FY2023-24, but only INR 2,000 crore has been allocated for FY2026-27. The Department of Financial Services has told a parliamentary panel that zero MDR was "financially unsustainable in the long run". Industry bodies such as the Payments Council of India have long argued for an MDR on large merchants.

The stakes are high. UPI processed a record 24.51 billion transactions worth INR 29.82 lakh crore in August 2026. Of these, 15.51 billion were merchant payments worth INR 8.95 lakh crore, and payments above INR 2,000 made up 67% of that merchant value. So the MDR will fall on a small share of transactions that carry most of the money.

Trader bodies have pushed back. The Confederation of All India Traders (CAIT) has warned that retailers may split bills, shift to bank transfers or quietly reprice goods. The Retailers Association of India has said the burden could undo years of progress. In Bengaluru, traders have warned of a return to cash, with the FKCCI saying even a small cost "may discourage digital payments". The Chamber of Trade and Industry (CTI) has sought a rollback, saying the MDR will affect around 6 crore traders. CAIT president Praveen Khandelwal has sought a brief deferral of the rollout for a nationwide awareness drive, and has suggested that customers use RuPay debit cards, which carry no MDR, for higher-value payments. On September 30, a CAIT-led delegation of about 20 trade leaders met the Finance Minister, who assured them that their concerns would receive due consideration. Following the meeting, trade bodies withdrew a "No UPI Day" protest they had planned for October 2. The 0.4% MDR, however, remains set to take effect on October 15.

Merchants have also told LocalCircles they are not ready for this rate. In a LocalCircles survey released on September 16, 2026, with over 32,000 responses from businesses across 242 districts, only 17% of merchants said they were willing to bear a 0.4% MDR on UPI payments above INR 2,000. 41% said they will not bear any MDR, and another 9% do not accept UPI at all. The most common ceiling, chosen by 15%, was just 0.04%. Consumers have been equally firm. In an August 2026 LocalCircles survey of over 45,000 UPI users across 322 districts, 53% said they would move away from UPI for larger payments if the MDR was recovered from them. In an earlier survey released in March 2025, 73% of UPI users said there should be no charge on UPI transactions at all.

With the MDR start date two weeks away and pass-through the biggest open risk, LocalCircles asked consumers what they would do if a merchant added the fee to their bill. The survey received over 67,000 responses from UPI users located across 291 districts of India. The key findings are detailed below.

If a 0.4% MDR on UPI is passed on to consumers, 76% expect to use cards, cash or bank transfers for purchases above INR 2,000

The survey asked UPI users, "If a merchant asks you to pay an additional amount/fee for making a UPI payment above INR 2,000, what would you most likely do?" This question received 31,206 responses.

In response, 27% said they would "pay in cash" and 26% said they would "switch to credit card". 14% said they would "switch to debit card" and 4% would "use bank transfer/NEFT/IMPS". 9% said they would "ask the merchant for another payment option without an additional charge". 2% would "avoid/delay the purchase". Only 14% said they would "continue paying by UPI and bear the additional amount", while 4% could not say.

Put simply, only 1 in 7 UPI users surveyed will pay the fee. Over 8 in 10 will move to another mode or option with no or lower cost. The single largest group, at 27%, will go back to cash.

If merchant passes on the MDR fee, only 14% Indians surveyed will continue using UPI for payments above INR 2,000

To understand the lasting impact on payment habits, the survey asked, "Going forward, for purchases above INR 2,000, which payment mode do you expect to use most often if UPI payments result in an additional cost?" This question received 37,654 responses.

In response, 26% said "credit card" and another 26% said "cash". 13% said "debit card" and 11% said "bank transfer/NEFT/IMPS". Only 20% said they would still use "UPI" most often, while 4% could not say. None chose any other digital payment method.

This means 76% of UPI users surveyed expect to move their larger payments off UPI if it carries an extra cost. Cards together would take 39%. Cash would regain a quarter of these payments. This is the high-value segment that makes up most of the value UPI carries today.

In summary, the survey findings show that consumers will not quietly pay a UPI fee at the counter. If a merchant passes on the MDR on a payment above INR 2,000, only 14% of UPI users surveyed will continue with UPI. 27% will pay in cash, 26% will switch to a credit card and 14% to a debit card. Going forward, 76% expect to use cards, cash or bank transfers most often for such purchases if UPI costs extra.

Read with the LocalCircles merchant survey, the picture is clear from both sides of the counter. Only 17% of merchants surveyed are willing to bear a 0.4% MDR, and only 14% of consumers surveyed will pay it if passed on. If the charge reaches the customer, the transaction is likely to leave UPI. The shift back to cash would also undo the formalisation gains of the last decade.

LocalCircles will be escalating these findings to the Department of Financial Services, the Reserve Bank of India and NPCI ahead of the October 15 rollout. It is urging four safeguards. First, the ban on passing the MDR to consumers should be made enforceable, with the daily monitoring announced from October 15 backed by clear, published penalties for any surcharge, convenience fee or service charge on UPI. Second, consumers should have a simple way to report such charges and get a refund, through their UPI app and bank.

Third, merchants in categories where consumers have no real choice, such as schools, hospitals, ticketing, utility billers and government portals, should be monitored closely from day one. Fourth, the 0.4% rate should be reviewed after six months against actual UPI volumes above INR 2,000 and the shift to cash. UPI grew because it was free for both the payer and the shop. Keeping it free for the consumer, in practice and not just on paper, is key to keeping high-value payments on UPI. The dialogue between the government and traders should continue until the rollout, so that the cost is settled between the merchant and the payments ecosystem and consumers are not caught in the middle.