The Merchant Discount Rate (MDR) is a concept and a fee structure in the Indian economy, defined as the charge a merchant pays to their acquiring bank for processing a digital payment transaction. It is typically a small percentage of the transaction value and is distributed among the participants in the payment ecosystem, such as the acquiring bank, the issuing bank, and the card network or payment processor. The MDR mechanism originated with card-based payments, like credit and debit cards, to cover the costs of infrastructure, fraud prevention, and service provision.
In India, the Reserve Bank of India (RBI) has historically regulated MDR for debit card transactions under the Payment and Settlement Systems Act, 2007. For instance, the RBI rationalized the MDR for debit cards in December 2017, effective January 1, 2018, based on merchant turnover and transaction type, with a cap of 0.40% for small merchants.
A significant change occurred on January 1, 2020, when the government introduced a zero-MDR regime for transactions made via indigenous systems like Unified Payments Interface (UPI) and RuPay debit cards to promote digital payments. This zero-MDR policy, which lasted for nearly six years, was a temporary measure that shifted the cost burden to the government and banks.
The zero-MDR regime was recently replaced for certain transactions. Effective October 15, 2026, a revised MDR framework, outlined by the National Payments Corporation of India (NPCI), introduced a charge on specific Person-to-Merchant (P2M) UPI transactions. The new mechanism levies a 0.4% MDR on P2M transactions exceeding ₹2,000, with a maximum cap of ₹300 for high-value transactions. Crucially, the framework maintains that all Person-to-Person (P2P) transactions and P2M transactions up to ₹2,000 remain free for the consumer, and the charge is explicitly on the merchant, not the customer. This change was introduced to make the UPI ecosystem financially sustainable and support continued investment in its infrastructure.