UPI MDR Fee: Small Merchants and Gig Workers Face 0.4% Levy From October 15

Small businesses, retailers and some gig workers are preparing for the impact of a 0.4% merchant discount rate (MDR) on qualifying UPI person-to-merchant transactions, with the new framework scheduled to take effect from October 15, according to the supplied report.

The proposed charge applies to P2M UPI transactions above ₹2,000, while transactions above ₹75,000 will have the MDR capped at ₹300.

The changes are drawing particular attention from businesses operating on thin margins, especially those whose transactions are concentrated between ₹2,000 and ₹75,000.

How the New UPI MDR Structure Works

Under the framework described in the report, the chargeable transaction range for P2M payments is ₹2,000 to ₹75,000.

For transactions above ₹75,000, the MDR is capped at ₹300.

A separate threshold concerns the classification of certain users making business-related payments through personal UPI accounts.

If UPI receipts cross ₹1 lakh for three consecutive months, the account can transition from person-to-person (P2P) classification to person-to-merchant (P2M) classification.

This provision has raised questions among professionals and gig workers who currently receive customer payments directly into personal UPI accounts.

Small Merchants Concerned About Margin Pressure

For businesses with narrow profit margins, even a relatively small transaction charge can add up when payment volumes are high.

The Association of All India Mobile Retailers (AIMRA), in a September 16 letter to the Finance Ministry, reportedly requested that small and medium-sized mobile retailers be exempted from the proposed MDR.

AIMRA said that a retailer processing ₹10 lakh to ₹14 lakh in monthly UPI payments could face a direct monthly cost of approximately ₹4,000 under a 0.4% MDR.

The association has also raised concerns about higher smartphone prices and weaker retail sales, arguing that additional transaction costs could put further pressure on smaller stores.

Trade organisations, including AIMRA, were also reported to be planning protests against the levy.

Merchant Classification Raises Questions

Another issue concerns what happens after an account moves from P2P to P2M classification.

Dharmender Jhamb, Partner and Fintech Industry Leader at Grant Thornton, said the current framework does not clearly specify whether the change is permanent or whether an account can return to P2P status if receipts subsequently fall below ₹1 lakh.

“What it clearly defines is the upward transition. A look-back or periodic reassessment mechanism is not separately provided for at present and may be further defined as the framework evolves,” Jhamb said.

The issue could be relevant to professionals and gig workers whose monthly receipts fluctuate significantly.

Jewellery Retailers Could Also Feel the Impact

Jewellery businesses are another segment watching the proposed MDR closely.

The World Gold Council has reported increased consumer interest in lightweight, lower-carat and studded jewellery as higher gold prices influence purchasing behaviour.

Karan Jagani Jain, Co-Founder and CEO of Jwero.ai, said the MDR cap could limit the impact on very large transactions but that smaller jewellery businesses selling lower-value products could face greater pressure.

For example, retailers selling lightweight jewellery or gold coins may process a larger number of transactions within the range affected by the MDR.

Jain said some jewellers could explore alternatives to UPI if transaction charges begin to materially reduce margins.

Gig Workers and Cab Drivers Also Face Concerns

The potential impact is not limited to conventional retail businesses.

Some ride-hailing drivers accept customer payments directly through their own UPI accounts. If those accounts cross the specified threshold and become subject to merchant classification, questions could arise over who ultimately absorbs the payment-processing cost.

Shaik Salauddin, Co-Founder and National General Secretary of the Indian Federation of App-Based Transporter Workers, argued that workers should not indirectly bear payment-processing costs through reduced fares, incentives or other deductions.

The issue is particularly relevant as ride-hailing platforms including Uber, Ola and Rapido have increasingly used subscription-style arrangements with drivers in India.

Which Businesses Could Be Most Exposed?

Anupam Mathur, Professor of Economics at the Takshashila Institution, said the impact is likely to be concentrated among businesses with a high volume of transactions in the ₹2,000-to-₹75,000 range and limited ability to raise prices.

Businesses potentially exposed include:

• Electronics and mobile retailers
• Wholesalers and distributors
• Building-material dealers
• Furniture businesses
• Travel agents
• Local service providers
• Small jewellery retailers

Mathur noted that NPCI’s figures indicate that 96% of transactions are unaffected, according to the supplied report.

The distinction is important because the proposed MDR would not apply uniformly across all UPI payments.

Government Links UPI MDR With Formalisation

The new framework also forms part of a broader push to connect informal businesses with formal digital payment infrastructure.

In a September 15 press release cited in the report, the Union government said the system would connect payment systems used by informal street vendors with formal merchant accounts.

The stated objective is to support wider adoption of digital payments in the unorganised sector while bringing more commercial activity into formal payment channels.

UPI Monetisation Expands Beyond Traditional Payments

The proposed MDR comes as India’s fintech industry adjusts to changes in several other digital-payment revenue streams.

The Payments Council of India had formally sought an MDR of 0.3% on large merchants in March 2025, according to the supplied report. The eventual rate discussed in the new framework is 0.4%.

At the same time, regulatory changes have affected other payment categories, including real-money gaming and credit-card-funded rent payments.

Real-Money Gaming Revenue Hit by Regulation

Parliament passed the Online Gaming Act, 2025, which prohibited financial transactions and advertising associated with real-money gaming.

According to PhonePe’s updated draft red herring prospectus cited in the report, advertising and transaction-related revenue from real-money gaming amounted to ₹2,449.02 million in FY25, representing 4.19% of the fintech company’s gross margins.

The regulatory change removed an important revenue stream for payment companies involved in the category.

Credit Card Rent Payments Also Face Restrictions

Another revenue source affected by regulatory intervention was credit-card-based rent payments.

The Reserve Bank of India reportedly raised concerns in a September 2025 communication to PhonePe about credit-card rent payments made to beneficiaries who were not onboarded as merchants.

PhonePe subsequently stopped payment services for rent and related categories.

Its DRHP cited in the report showed that the category had generated ₹12,622.7 million in revenue, representing 17.89% of platform revenue and 8.92% of gross margins.

Other fintech companies subsequently discontinued similar rent-payment mechanisms.

MobiKwik Co-Founder and CFO Upasana Taku said in an earnings call that rent payments had effectively been shut down across the industry, with revenue from the category becoming negligible.

MDR Could Become a New UPI Revenue Stream

The changes highlight a broader shift in India’s digital-payments market.

Fintech companies have historically developed multiple revenue streams around payment infrastructure and adjacent financial services. Regulatory restrictions on certain payment use cases have reduced some of those opportunities, while merchant payments could provide another potential source of transaction revenue.

Mathur described the changes as part of a broader movement in which revenue can shift toward areas that remain within the regulatory framework.

For merchants, however, the central question is how much of any new payment cost can be absorbed without affecting already-thin operating margins.

What Happens Next for Small Businesses

The proposed UPI MDR framework places greater focus on the economics of digital payments for businesses that depend heavily on UPI.

Large transactions benefit from the ₹300 cap, while businesses handling frequent payments within the ₹2,000-to-₹75,000 range could face a more direct impact.

Questions around P2P-to-P2M classification and whether accounts can later revert to P2P status could also become important for professionals and gig workers with fluctuating payment volumes.

As the October 15 implementation date approaches, merchants, fintech companies and industry associations are likely to seek further clarity on classification, exemptions and the treatment of different categories of UPI users.