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Telangana Chief Minister Revanth Reddy took to X to question the Centre’s decision to introduce a Merchant Discount Rate (MDR) on certain UPI payments. Reddy argued that even if customers are not directly charged, the additional cost could eventually reach them through higher prices.
His comments came after the National Payments Corporation of India (NPCI) announced that specified merchant UPI transactions above ₹2,000 will attract a 0.4% MDR from October 15, 2026, capped at ₹300 for transactions of ₹75,000 and above. Reddy has argued that the move threatens the zero-MDR model that helped UPI become a mass payment system.
To understand the controversy, it is important to distinguish between three types of UPI transactions. P2P, or person-to-person, is when you send money to another individual, for example, paying a friend ₹5,000, and these transactions remain completely free regardless of the amount. P2M, or person-to-merchant, is when you pay a business, such as a restaurant or retailer; specified P2M transactions above ₹2,000 are the ones that will now attract MDR. P2PM refers to eligible small merchants, such as neighbourhood shops and street vendors, who remain covered by the zero-MDR framework subject to the prescribed conditions.
The Finance Ministry says payments to merchants up to ₹2,000 and transactions covered by the small-merchant framework will remain free, meaning about 96% of P2M transactions will be unaffected.
What exactly is MDR?
Merchant Discount Rate is a fee associated with processing a digital payment made to a merchant. It is not a government tax. The Centre says the money is distributed among participants in the payment ecosystem, including banks and payment application providers, to support the operation and expansion of UPI. Under the standard rate, a ₹10,000 eligible merchant transaction would generate an MDR of ₹40. But that ₹40 is not supposed to be added to the customer’s bill as a separate UPI charge. The government, in a PIB release has said users will not pay MDR.
The government’s argument is that UPI needs a sustainable revenue model as it has grown into one of the world’s largest digital-payment systems. The RBI has backed the move, saying MDR on large-value transactions can help support continued investment in technology, infrastructure and payment acceptance networks. The central bank has also stressed that UPI will remain free for users, while MDR can be levied on merchants for specified P2M transactions above ₹2,000.
The Centre is also emphasising that this is a relatively narrow intervention. The new standard rate is 0.4%, with a ₹300 cap, while certain sectors such as railways, telecom, insurance and fuel have separate rates. Eligible small merchants remain outside the charge. The government says the objective is to generate revenue from higher-value merchant payments without imposing a direct cost on ordinary users or undermining UPI adoption among smaller businesses.
The Counterargument
But this is where Revanth Reddy’s counterargument comes in. The question is not necessarily whether a customer will suddenly see a ₹40 UPI fee on a ₹10,000 purchase. The government says that will not happen. The question is what a merchant does when a previously zero-cost payment channel acquires a cost. A merchant could absorb the MDR, accept a lower margin or potentially factor the additional cost into its broader pricing. The Opposition’s argument is that while MDR may not be directly passed on to customers, the economic cost could still eventually be reflected in what consumers pay.
There is also a significant distinction behind the government’s 96% figure. It refers to the number of P2M transactions, not the value of those transactions. Ninety-six transactions of ₹1,000 each and four transactions of ₹50,000 each would mean 96% of transactions are below the threshold, but the four larger transactions would account for most of the money. That means the more revealing question is not simply how many transactions attract MDR, but what proportion of P2M transaction value will actually be subject to the new fee.
Wait and watch game
That leaves the central issue unresolved. The government is trying to create a revenue stream for the UPI ecosystem while keeping the customer-facing experience free; Revanth Reddy and the Opposition are questioning whether the cost can really be kept away from consumers once merchants start paying it. The answer will become clearer after October 15, when the new system takes effect and actual data shows whether merchants absorb the cost, alter their payment behaviour or reflect it elsewhere in their prices.
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