For millions of Indians, paying through UPI has become second nature. Whether it is buying groceries, ordering food, paying at a neighbourhood shop or splitting a restaurant bill, scanning a QR code has become one of the easiest ways to make a payment.
There is also little reason to think twice before making a small UPI transaction. Unlike credit cards, which can involve charges for merchants, UPI payments have largely remained free for consumers and merchants. This zero-cost structure has played a major role in making UPI one of the most widely used digital payment systems in the country.
But the economics of this payment ecosystem could be changing.
The proposed return of the Merchant Discount Rate (MDR) on certain UPI transactions has brought the issue back into focus. While consumers will not be directly charged for making UPI payments under the proposed framework, payment service providers and merchants could face additional costs. This, in turn, could have implications for the cashback, scratch cards, discounts and reward offers that consumers have become accustomed to receiving.
For consumers, the change may not show up as a direct charge on their UPI transactions. But it could become visible in another way. The attractive cashback that appears after scanning a QR code, discounts offered by merchants on digital payments and promotional campaigns run by payment apps could undergo a change.
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UPI MDR rollout: Why is the proposal back in focus after Diwali?
The issue has gained attention because the National Payments Corporation of India (NPCI) had already postponed the proposed MDR framework in October.
The charges were originally scheduled to come into effect from October 15, 2026. However, on October 13, NPCI’s UPI and Services Steering Committee decided to defer the implementation, citing the festive season.
In its statement, NPCI said that MDR on select person-to-merchant UPI transactions would be implemented immediately post Diwali and that the date would be notified separately.
Diwali was celebrated on November 8. With the festival now over, attention has returned to the implementation timeline. The question is whether the revised charges will be introduced immediately or whether merchants and payment companies will get more time to prepare.
As of November 10, NPCI has not announced a specific effective date. There have also been reports about a possible January 2027 rollout, but that date has not been officially confirmed.
For payment companies and merchants, this is not just a question of when the charges start. It is also about how the cost will be distributed across the digital payment ecosystem and whether businesses will change their promotional strategies once they have to pay for accepting certain UPI transactions.
What is the proposed UPI MDR framework and who will pay?
To understand the possible impact on cashback and reward programmes, it is important to understand what MDR means.
Merchant Discount Rate is a fee that a merchant pays to the payment ecosystem for processing a digital transaction. It is a merchant-side charge and not a fee that the customer directly pays for making a payment.
UPI transactions have largely operated under a zero-MDR structure since January 2020. This means merchants have not had to pay a transaction-based fee for accepting regular UPI payments. The proposed framework seeks to change this for certain higher-value merchant transactions.
Under the framework announced in September 2026, a 0.4% MDR will apply to eligible person-to-merchant transactions above Rs 2,000. The charge will be capped at Rs 300 per transaction for payments of Rs 75,000 and above.
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However, the framework does not bring every UPI transaction under the charging structure.
Here is how the proposed structure works:
| Transaction category | Proposed MDR |
|---|---|
| Person-to-person payments | Zero MDR, irrespective of transaction value |
| Merchant payments up to Rs 2,000 | Zero MDR |
| Eligible small merchants receiving up to Rs 1 lakh a month through specified UPI QR arrangements | Zero MDR |
| Specified merchant payments above Rs 2,000 | 0.4%, capped at Rs 300 |
| Specified essential services such as railways, telecom, insurance, fuel and agricultural inputs | Flat Rs 5 per eligible transaction |
| Specified capital market transactions, including mutual funds and stockbroking | 0.02%, capped at Rs 300 |
The government has clarified that approximately 96% of person-to-merchant UPI transactions will remain unaffected by the revised framework. MDR is neither a tax nor a charge collected by the government or NPCI. It is distributed among participants in the payment ecosystem, including banks and payment application providers.
This distinction is important because the proposal does not mean that consumers will suddenly have to pay for every UPI transaction.
A person transferring Rs 10,000 to a friend will not attract MDR. Similarly, a customer paying Rs 500 at a grocery store will not attract the proposed merchant charge.
The impact will be concentrated on specified higher-value merchant payments. These transactions account for a much larger share of the total value of UPI payments than their share in transaction volumes.
Will payment apps rethink their cashback and reward strategies?
This is where the proposed change could have an interesting impact on consumers.
For years, payment apps have used cashback, scratch cards, coupons and brand partnerships to attract users and encourage them to transact more frequently.
These incentives helped payment apps build customer loyalty when digital payments were still gaining acceptance. A cashback of Rs 10 or a scratch card after a payment may not seem like much, but such offers helped create an incentive to use one app over another.
However, the market has changed. UPI is now a regular payment habit rather than a new digital product that needs to be promoted aggressively. Consumers often choose an app based on convenience, acceptance, speed and reliability rather than the possibility of receiving cashback.
Rohit Mahajan, Founder and CEO of plutos ONE, believes the proposed MDR framework will not necessarily bring an end to these incentives. Instead, it could change the way payment apps compete for customers.
“I don’t think the return of MDR will fundamentally change consumer behaviour or eliminate cashback and reward programmes. Gratification will remain an important part of the UPI experience.”
His argument is that rewards will continue to be relevant, but payment companies may become more selective about where they spend their promotional budgets. Instead of offering incentives across a wide range of transactions, they could focus on customer engagement, transaction frequency and partnerships with merchants.
This could also open up opportunities for smaller fintech companies and bank-led UPI applications to compete with established players. Rather than relying entirely on large cashback campaigns, they could differentiate themselves through better user experience, targeted rewards and merchant partnerships.
Mahajan believes that the larger opportunity lies in building a more competitive ecosystem rather than simply reducing promotional offers.
Eshita Singh, Head of Payments Proposition at IDfy, sees a more direct link between MDR and the way payment apps may allocate their promotional spending.
She points out that the incentive structure could increasingly favour higher-value merchant transactions because that is where the revenue opportunity lies.
“It changes where the spend goes more than how much. For six years UPI acquiring was a pure cost line, which is why big cashback faded once the land-grab ended. Now a payer app earns 8 bps on every eligible transaction. Expect incentives to narrow onto merchant payments above ₹2,000 — the only slice that earns anything — rather than spread across every ₹50 payment.”
This is an important distinction. Payment apps may not necessarily cut their overall promotional budgets. Instead, the rewards could become more targeted towards transactions that generate revenue for them.
For example, an app may have less reason to offer cashback on a routine Rs 100 grocery payment than on an eligible transaction of Rs 5,000. The latter offers a revenue opportunity under the proposed MDR structure.
In effect, the competition could move from rewarding users for simply making payments to encouraging them to route eligible higher-value payments through a particular application.
Will cashback become more selective rather than disappear?
The distinction between broad-based cashback and targeted rewards could become more important as the MDR framework takes shape.
Eshita believes the earlier cashback race had already lost steam because payment apps were spending money to acquire and retain users without earning a transaction-based fee on UPI payments. The introduction of MDR could bring back some promotional activity, but with a different objective.
She points out that person-to-merchant transactions above Rs 2,000 account for only around 4% of merchant transactions by volume but roughly two-thirds of their value. This makes higher-value payments particularly important for payment apps looking to generate revenue under the proposed structure.
She also expects newer third-party UPI applications and companies with their own payment platforms to have a stronger incentive to promote their apps.
Her reasoning is straightforward. If a business group can route payments through its own UPI application, it can earn a share of the MDR rather than allowing that revenue to go to another payment application provider. This turns cashback into a customer acquisition expense with a measurable revenue opportunity attached to it.
For consumers, this could mean that reward programmes become more differentiated. Someone making a large purchase through a particular payment app may receive an attractive offer, while someone making several small everyday payments may see fewer incentives.
Mahajan, however, believes the longer-term opportunity for payment apps goes beyond transaction-based rewards.
He expects UPI applications to evolve into broader consumer platforms offering services such as travel, shopping, insurance, mutual funds and other financial products. In such a model, payment apps can use UPI to bring consumers onto their platforms and subsequently earn through partnerships, cross-selling and personalised brand offers.
He argues that the real competition will be about engaging consumers beyond the payment transaction itself. This is also why cashback and brand-led offers are unlikely to disappear completely, even if the way they are funded changes.
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Will merchants reduce discounts to absorb the MDR cost?
Payment apps are only one part of the story. Merchants could also reassess their discount strategies once the proposed MDR becomes applicable.
Until now, accepting UPI has been a relatively inexpensive way for merchants to collect payments. The proposed charge introduces an additional cost on specified higher-value transactions. Businesses will have to decide whether to absorb this cost, adjust their margins or recover some of it through their pricing and promotional strategies.
For a large retailer, the additional charge may appear manageable. But for a business operating on thin margins, even a small increase in transaction costs can affect profitability.
This is particularly relevant because merchants do not necessarily have the flexibility to increase the printed price of every product. Discounts and promotional offers are often easier to adjust.
Eshita explains why this could become an important area of impact.
“Yes, discounts are the most likely place where this shows up. MRP is printed and often a manufacturer’s decision, so the discount is the one lever retail controls day-to-day. Also, MDR applies to the transaction, not the item so a ₹500 shampoo bought alone attracts nothing, while the same shampoo inside a ₹2,500 basket sits in a transaction that does. No retailer prices by basket size, and no retailer prices by payment method at the shelf. There is one price per product for every customer. So the cost gets recovered across the assortment and the way it gets recovered is via lowering the discounts.”
Her point highlights an aspect that consumers may not immediately notice.
Consider a customer buying a shampoo worth Rs 500. If that is the only purchase, the proposed MDR threshold is not crossed. But if the customer buys groceries, personal care products and household items worth Rs 2,500 in a single transaction, the payment falls into the eligible category.
The merchant cannot realistically have one price for a product when it is bought individually and another when it forms part of a larger basket. The additional payment cost may therefore influence the overall discount strategy rather than being reflected in the price of a particular product.
Consider a Rs 5,000 eligible transaction. At an MDR of 0.4%, the basic charge works out to Rs 20. The actual cost to the merchant will also depend on the applicable GST treatment and whether the merchant can claim input tax credit.
This is an important distinction because the GST component of MDR may be available as input tax credit to eligible registered merchants. It should not automatically be treated as an additional unrecoverable cost for every business.
The impact will depend on the merchant’s tax status, margins, transaction mix and ability to absorb the charge.
Will large retailers and small merchants respond differently?
The impact of MDR is unlikely to be uniform across the merchant ecosystem.
Large retailers and e-commerce platforms generally have more room to negotiate with payment service providers, run loyalty programmes and absorb transaction-related costs. They also have greater flexibility to use payment offers as part of their customer acquisition strategy.
Smaller merchants, on the other hand, operate with tighter margins and may not have the same bargaining power. However, a large section of small merchants will continue to remain protected under the zero-MDR framework, provided they meet the specified eligibility conditions.
The distinction between the two groups becomes clearer when the profitability of a transaction is considered.
Eshita illustrates this with a Rs 5,000 transaction. The MDR and GST together would cost the merchant Rs 23.60 before any eligible input tax credit. For a business earning an 8% net margin, this represents around 6% of the profit generated from that sale. For a business operating on a 3% net margin, the same charge would account for around 16% of the profit.
In other words, the same MDR rate can have very different implications depending on the merchant’s profitability.
She also highlights an interesting difference between independent merchants and large platforms that operate their own payment applications.
For some large platforms, the MDR paid by the merchant entity could partly flow back to another entity within the same corporate group through its payment application. This makes the overall cost more manageable at the group level.
An independent merchant does not have this advantage. The payment-related charge leaves the business and goes to the payment ecosystem.
Eshita expects this difference to influence how aggressively large platforms and independent merchants continue offering payment-linked discounts.
She says that large platforms with captive payment systems may actually have the financial incentive to sustain or even expand cashback programmes because the MDR can become a revenue source within their own business ecosystem.
For smaller independent merchants, however, the charge is a direct expense wherever it applies.
Mahajan takes a somewhat different view of how merchants could respond. He does not expect businesses to necessarily withdraw discounts simply because MDR is introduced.
He believes UPI can become a channel through which merchants attract customers, encourage repeat purchases and build loyalty.
For instance, restaurants, wellness businesses and other offline retailers could use merchant-funded offers to encourage customers to visit their outlets and make repeat purchases.
He believes the opportunity is to move beyond payment-linked discounts towards merchant-funded offers and loyalty programmes. In his view, UPI can become a customer acquisition and repeat-business channel rather than just another way to collect money.
This suggests that while some merchants may become more selective about discounts, others could continue offering benefits where they see a clear business advantage.
Could consumers lose the discounts they currently receive on UPI payments?
For consumers, the most important question is whether the proposed MDR will make digital payments less rewarding.
The immediate answer is that there is no provision requiring payment apps or merchants to withdraw existing cashback programmes or discounts. The proposed framework also does not allow merchants to simply start charging customers an MDR for making eligible UPI payments.
However, the indirect impact could be different.
If payment apps decide to concentrate their promotional budgets on higher-value transactions, consumers making smaller payments may receive fewer scratch cards and cashback offers. Similarly, if merchants decide to absorb the MDR by reducing discounts, customers could find fewer attractive deals while shopping.
The impact may also differ across categories.
For example, an e-commerce platform could continue offering cashback on selected UPI transactions as part of its customer acquisition strategy. A neighbourhood retailer, meanwhile, may decide to reduce the discount it offers on a larger purchase to protect its margins.
There could also be a shift towards brand-funded rewards. Instead of the payment app bearing the entire cost of cashback, brands and merchants could contribute towards promotional campaigns in exchange for better visibility and customer engagement.
This is where the interests of payment apps and merchants could overlap. Payment apps want customers to use their platforms more frequently, while merchants want to attract customers and increase sales. Targeted offers could help both achieve these objectives.
However, consumers should not assume that every UPI payment will continue to attract the same rewards and discounts they receive today.
Will the return of MDR change how Indians use UPI?
UPI’s biggest strength has been its convenience. Consumers do not need to carry cash, enter card details or worry about making small payments. The system has become a part of everyday financial transactions.
The proposed MDR framework is unlikely to change this basic behaviour, particularly because most merchant transactions by volume will continue to remain unaffected.
The government has maintained that around 96% of merchant transactions will remain outside the new charging structure. Person-to-person transfers will also continue to remain free irrespective of the amount.
Mahajan believes the convenience of UPI will continue to drive adoption, regardless of whether payment apps change their reward programmes.
He also points out that gratification remains important in consumer-facing businesses. The credit card industry has demonstrated how rewards and brand partnerships can continue to drive customer engagement even after a product has become widely accepted.
The difference is that payment apps may increasingly look at the wider consumer relationship rather than just the number of transactions.
For instance, an app may use a UPI transaction to introduce a customer to a shopping offer, travel booking, insurance product or investment service. This could create additional revenue opportunities and reduce its dependence on transaction-based promotional spending.
Eshita, meanwhile, believes the new framework could revive targeted cashback campaigns, particularly for transactions that generate revenue for payment apps.
But the key change will be in the economics of these offers. Payment companies will increasingly have to assess whether the cost of giving cashback is justified by the revenue they earn from a transaction or the wider customer relationship.
What should consumers and merchants watch out for?
The immediate development to watch is the formal implementation date of the revised MDR framework. NPCI’s October announcement specified that the charges would come into effect immediately after Diwali, but the exact date is yet to be notified separately.
Once the framework is implemented, the focus will shift to how payment apps, banks and merchants respond.
For consumers, the important things to watch will be changes in cashback campaigns, payment-linked discounts and the terms and conditions attached to promotional offers.
Merchants, meanwhile, will need to understand how the charges affect their transaction mix, payment costs and margins. Those operating with thin margins may have to review their discount structures, particularly for higher-value purchases.
There is also a need to distinguish between the proposed MDR and any direct fee charged to customers. MDR is a merchant-side charge under the proposed framework. Consumers should not confuse it with a transaction fee that they have to pay for using UPI.
The bigger question is not whether UPI will stop being free for consumers. It is whether the economics of keeping UPI free will change the benefits consumers receive around it.
The return of MDR could make the digital payments ecosystem more commercially sustainable and encourage greater competition among payment providers. But it could also change how cashback is funded, which transactions receive promotional benefits and how merchants use discounts to attract customers.
For consumers, UPI may remain just as convenient as before. What could change is the little extra they receive after making a payment.
Disclaimer:
This article is for informational purposes only. The proposed MDR framework and its implementation are subject to official notifications and clarifications from NPCI and the relevant authorities.
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