The new UPI framework introduced has no impact on any person-to-person transactions as UPI will continue to remain completely free for these, irrespective of the amount transferred, according to an explainer issued by the Finance Ministry on Tuesday.

Payments to merchants up to Rs 2,000, along with transactions covered under the zero-MDR framework for small merchants, will also remain free. Consequently, approximately 96 per cent of all P2M transactions will remain unaffected.

MDR will apply only to specified merchant transactions above Rs 2,000.

The Finance Ministry clarified that MDR is neither a tax nor a charge collected by the government or the National Payments Corporation of India (NPCI). It is distributed among payment ecosystem participants, including banks and payment application providers, to support the operation and continued expansion of the UPI ecosystem.

A nominal MDR of 0.4 per cent will apply only to P2M transactions above Rs 2,000. The MDR will be shared among payment ecosystem participants, including banks, payment service providers and UPI application providers. For transactions of Rs 75,000 and above, the MDR will be capped at Rs 300 per transaction.

Transactions above Rs 2,000 in essential and thin-margin sectors, including railways, telecommunications, insurance, fuel and agricultural inputs, will attract a flat MDR of Rs 5 per transaction. The flat charge will provide cost certainty for critical public services and businesses operating on narrow margins.

Payments relating to mutual funds, securities, stockbrokers, and dealers will attract an MDR of 0.02 per cent, capped at Rs 300 per transaction. The lower rate is intended to support continued retail participation in formal financial markets.

MDR is a charge within the merchant payment ecosystem. It is not a charge on customers making UPI payments. Banks have been advised to ensure that merchants do not pass MDR charges on to customers. UPI application providers are expressly prohibited from imposing platform fees or hidden charges.

Individuals will continue to have unlimited free usage, with no monthly quotas, volume restrictions, or tiered caps on free UPI transactions.

Daily transaction limits prescribed by banks and NPCI, generally ranging from Rs 1 lakh to Rs 5 lakh depending on the transaction category, are security and risk-management safeguards. They are not charging thresholds.

The framework therefore protects individuals, micro-enterprises, and small businesses while introducing a limited charge on larger merchant transactions.

A dedicated fund will be established to promote UPI adoption among small merchants. An amount equivalent to 5 per cent of total MDR collections will be contributed to this fund.

The fund will support wider UPI acceptance, sustained usage and the inclusion of small businesses in India’s digital payments ecosystem.

Revenue generated from larger merchant transactions will support banks, payment service providers and UPI application providers in expanding and improving payment infrastructure, including in rural and semi-urban areas, the explainer added.