India's free ride on digital payments is ending for big-ticket merchant transactions.

Finance Minister Nirmala Sitharaman is meeting traders' associations, including the Confederation of All India Traders (CAIT), on Wednesday to address industry concerns over the new 0.4 per cent merchant discount rate (MDR) on select UPI transactions above Rs 2,000, sources told ET NOW.

The meeting comes as the government tries to reassure small businesses ahead of the framework's rollout on October 15, 2026.

The session is expected to focus on making sure the MDR burden is not passed on to consumers, while addressing the worries raised by traders' bodies as India's flagship real-time payments system takes its first step toward a paid model.

What the new MDR framework does


Under the framework, a 0.4 per cent MDR will be levied on specified person-to-merchant (P2M) transactions above Rs 2,000, capped at Rs 300 for transactions of Rs 75,000 or more. Person-to-person payments will continue to remain free, and small merchants receiving up to Rs 1 lakh a month through UPI QR codes stay fully exempt.

Essential services including railways, telecom, fuel and insurance will attract a flat Rs 5 fee for transactions above Rs 2,000, while capital-market transactions such as mutual funds and stockbroking will carry a 0.02 per cent MDR, also capped at Rs 300.

The money does not flow to the government. Sitharaman told PTI the charge is a commercial arrangement among payments-ecosystem players, to be shared among NPCI, banks, POS machine providers and merchant-acquiring banks, to fund the technology infrastructure, innovation and other costs of running the system.

"Not a tax, not a cess": Sitharaman's defence


The finance minister moved last week to defuse opposition allegations that the fee would ultimately be passed on to shoppers.

"This is not a tax, this is not a cess, this is not even a surcharge. And the collection is not coming to the Consolidated Fund of India," she said, insisting consumers will continue to pay nothing extra for scanning and paying.

She argued that merchants already absorb the MDR applicable on credit and debit card transactions without adding it to customers' bills, and that digital payments help businesses grow, making it unlikely the new cost would reach shoppers' receipts and digital bills.

Most transactions stay untouched


Data from NPCI suggests the impact will be narrow. Managing director Dilip Asbe noted that nearly 75 per cent of all QR code transactions fall below Rs 2,000 and face no fee impact, and around 96 per cent of merchant transactions are estimated to remain unaffected overall.

The charge falls hardest on the largest players: corporations with digital turnover exceeding Rs 1,000 crore account for 80 per cent of all collected payment charges, with another 10 per cent coming from firms with annual turnover of Rs 1 crore or more.

Since these businesses routinely handle credit cards with higher processing rates, they are unlikely to transfer UPI service costs to retail shoppers.

For India's payments industry, the shift marks a turning point. UPI has run fee-free since its launch, a model that drove explosive adoption but left banks and apps funding the rails without revenue from merchant payments.

The 0.4 per cent levy is a cautious first step toward making one of the world's largest digital payments ecosystems financially sustainable.
By Hamza Faisal