One term frequently discussed in the UPI ecosystem is MDR, or Merchant Discount Rate.

MDR generally refers to a fee associated with processing certain merchant payments. However, the treatment of MDR on UPI is not as simple as applying one standard percentage to every transaction.

The applicable economics can depend on the payment instrument, transaction category, merchant classification, payment participants and prevailing regulatory or network rules.

This guide explains what MDR means in the UPI ecosystem, how P2M (Person-to-Merchant) transactions work, why ordinary bank-account UPI payments have historically operated under a zero-MDR framework, and what businesses and payment participants should understand about the 2026 environment.

What Is MDR?

MDR stands for Merchant Discount Rate.

It is a transaction-related charge associated with accepting and processing certain digital payments at merchants.

In a traditional card-payment ecosystem, MDR can be distributed among different participants involved in processing a transaction.

Depending on the payment system, participants can include:

• Merchant
• Acquiring bank
• Issuing bank
• Payment network
• Payment service provider
• Payment aggregator
• App or technology provider

The exact structure varies according to the payment instrument and applicable rules.

MDR Does Not Always Mean a Direct Charge to the Customer

MDR is generally discussed in relation to merchant acceptance rather than being a universal fee charged directly to customers.

The economic structure behind a digital payment can involve several participants, and the applicable charges depend on the specific payment method.

This distinction becomes particularly important with UPI because ordinary bank-account-based UPI merchant payments have a different framework from card transactions.

What Is UPI?

UPI is an instant payment system developed by the National Payments Corporation of India (NPCI) and operates within the regulatory framework overseen by the Reserve Bank of India.

It allows customers to make account-to-account payments through participating banks and UPI-enabled applications.

UPI can support different types of transactions, including:

• Person-to-Person (P2P)
• Person-to-Merchant (P2M)
• Person-to-Person-to-Merchant (P2PM)
• Business-to-Business (B2B)
• Other specialized transaction categories

NPCI describes UPI as an instant payment system that allows money to move between bank accounts.

What Is a P2M Transaction?

P2M means Person-to-Merchant.

It refers to a payment where an individual customer pays a merchant through UPI.

For example:

Customer → UPI app → Banking/UPI infrastructure → Merchant

A P2M transaction can take place through:

• QR code
• UPI ID
• Online checkout
• In-app payment
• Other supported merchant-acceptance mechanisms

Simple P2M Example

Suppose a customer purchases something from a local business and scans its UPI QR code.

The customer:

1. Opens a UPI application.
2. Scans the merchant QR.
3. Enters or confirms the amount.
4. Checks the merchant information.
5. Enters the UPI PIN.
6. Authorizes the transaction.
7. The amount is transferred through the UPI ecosystem.

The merchant receives confirmation of the transaction.

P2M vs P2P

The main difference is the recipient.

The distinction matters because NPCI and other ecosystem participants use transaction categories for processing, reporting and regulatory purposes.

What Is Zero MDR on UPI?

One of the most important concepts in UPI merchant payments is zero MDR for certain account-based UPI transactions.

The Government of India introduced a framework under which prescribed digital payment modes, including UPI, could be accepted without MDR in the applicable circumstances.

This means that an ordinary bank-account-based UPI payment should not automatically be treated like a card transaction with a conventional merchant discount rate.

The absence of MDR, however, does not mean that every UPI transaction has identical economics.

Different UPI-linked payment instruments can have different interchange or processing arrangements.

Why Was Zero MDR Introduced?

The zero-MDR framework was intended to encourage digital payments and expand acceptance among merchants.

It has particular relevance for small businesses because merchant acceptance can otherwise involve transaction-related costs.

The framework helped make QR-based account-to-account payments accessible across a very broad range of merchants.

This has contributed to UPI's rapid expansion.

How Do UPI Participants Earn If MDR Is Zero?

A common question is:

If there is no MDR, how does the UPI ecosystem operate?

UPI involves several participants, including:

• Issuer banks
• Acquirer or payee banks
• Payment service providers
• Third-party application providers
• NPCI
• Merchants

For certain UPI transactions, the government has also used financial incentives to support the ecosystem rather than relying on a conventional merchant MDR.

The precise financial arrangements can vary according to transaction type and applicable policies.

Therefore, zero MDR should not be interpreted as meaning that no money ever moves between ecosystem participants.

It means that a conventional merchant discount charge is not applied to the merchant for the transaction category covered by the zero-MDR framework.

What Is the Difference Between MDR and Interchange?

MDR and interchange are related concepts but should not be treated as identical.

MDR

MDR is commonly understood as the merchant-side transaction charge associated with accepting a payment.

Interchange

Interchange is a fee exchanged between certain participants in a payment ecosystem.

For example, a particular payment instrument can have an interchange arrangement even when the merchant is not directly charged an MDR.

This distinction became particularly relevant with RuPay credit cards linked to UPI.

UPI Credit Card Transactions Are Different

UPI can also support payments using certain credit accounts.

This does not mean that every UPI transaction has the same commercial structure as an ordinary bank-account payment.

For example, NPCI's framework for RuPay credit cards linked to UPI specifies applicable interchange arrangements and identifies different treatment for small offline merchants.

Therefore, it is useful to distinguish between:

Bank-account UPI → Merchant

and

Credit account/card-linked UPI → Merchant

The payment source can affect the applicable charges and rules.

UPI and RuPay Credit Cards

NPCI introduced functionality allowing eligible RuPay credit cards to be linked to UPI.

Under the framework, customers can discover eligible credit-card accounts through participating applications and link them to a UPI Virtual Payment Address.

The transaction is authenticated through the applicable UPI authentication mechanism.

NPCI's operating framework also specifies that certain transaction categories such as P2P are not permitted for UPI-linked RuPay credit-card transactions.

This is one reason why the statement "UPI has zero MDR" needs context.

The underlying payment source and transaction type matter.

Small Offline Merchants

The treatment of small offline merchants is another important element.

NPCI's RuPay credit-card-on-UPI framework identifies a category of Small Offline Merchants and provides for nil MDR-related charges up to the specified transaction amount under the applicable rules.

The classification and transaction threshold should not be generalized to every merchant or every type of UPI payment.

Businesses should therefore refer to the applicable NPCI and regulatory requirements for their particular payment arrangement.

P2PM Transactions

UPI also supports a category known as P2PM, or Person-to-Person-to-Merchant.

This category can cover certain merchant-like transactions involving payment flows where the merchant characteristics or transaction arrangement differ from a conventional P2M transaction.

The distinction is relevant because UPI's ecosystem uses transaction categories for processing and compliance.

The exact treatment depends on the applicable NPCI rules and transaction characteristics.

B2B Transactions on UPI

UPI is not limited to consumer-to-merchant payments.

NPCI introduced Business-to-Business (B2B) as a separate UPI category to support business payments such as supplier and vendor payments.

NPCI's operating circular explains that B2B was introduced in addition to categories including P2P, P2M and P2PM.

Examples can include:

• Vendor payments
• Supplier payments
• Business collections
• Certain enterprise transactions

However, specific transaction types such as some credit-card payments, loan repayments and EMI collections were identified separately from the B2B category in NPCI's framework.

UPI Merchant Categories

Merchant transactions can be associated with Merchant Category Codes (MCCs).

An MCC helps identify the type of business or commercial activity associated with a merchant.

Merchant categorization is important for:

• Transaction processing
• Risk controls
• Reporting
• Compliance
• Payment rules
• Applicable transaction treatment

Incorrect merchant classification can create operational and compliance problems.

Who Are the Main Participants in a UPI Merchant Transaction?

A simplified UPI merchant transaction can involve several participants.

Customer

The person initiating the payment.

Issuer Bank

The bank holding the customer's account or providing the relevant payment instrument.

UPI Application

The application through which the customer initiates the transaction.

PSP Bank

The Payment Service Provider bank supporting the relevant UPI application or participant.

Acquirer / Payee Bank

The bank supporting the merchant side of the transaction.

Merchant

The business receiving the payment.

NPCI

NPCI operates the UPI network infrastructure and establishes applicable operating rules and processes.

Simplified UPI P2M Flow

The transaction can be represented as:

Customer

↓

UPI Application

↓

PSP / Issuer Bank

↓

NPCI UPI Infrastructure

↓

Acquiring / Payee Bank

↓

Merchant

The actual technical architecture can be more complex depending on the participants and payment arrangement.

What Does a Merchant Need to Accept UPI?

A business generally needs a UPI-enabled merchant acceptance arrangement.

This can include:

• Merchant UPI ID
• QR code
• Acquiring bank relationship
• Payment aggregator arrangement
• Online payment integration
• Appropriate merchant classification
• Settlement account

The exact onboarding requirements depend on the acquiring institution and payment arrangement.

Static QR vs Dynamic QR

UPI merchant acceptance can use different types of QR codes.

Static QR

A static QR generally identifies the merchant and allows the customer to enter the payment amount.

Dynamic QR

A dynamic QR can contain transaction-specific information, such as the amount or reference details.

Dynamic QR codes are frequently used in structured checkout environments because the payment information can be generated for a specific transaction.

NPCI's 2026 BHIM UPI merchant QR guidelines also contain specific design and branding requirements for static and dynamic merchant QR implementations.

2026 UPI Updates

UPI continues to evolve in 2026.

NPCI's 2026 circular repository shows ongoing updates covering areas such as:

• UPI operating processes
• Fraud and chargeback handling
• Merchant QR requirements
• International merchant acceptance
• On-device biometric authentication
• Numeric UPI IDs
• Settlement and back-office processes
• Other ecosystem enhancements

NPCI's current circular repository lists multiple FY 2026–27 UPI circulars, demonstrating that UPI rules and operating procedures continue to be updated.

2026 Update: Merchant QR Guidelines

NPCI's June 2026 BHIM UPI Guidelines specify design requirements for merchant QR implementations.

The guidelines include instructions such as displaying the "Scan & Pay with any UPI app" message and maintaining specified QR sizing and branding proportions.

For eligible dynamic QR implementations supporting credit-based UPI payments, the guidelines also address the display of "Pay with Credit on UPI."

These are merchant-acceptance and presentation requirements rather than a change to the general zero-MDR principle for ordinary account-based UPI payments.

2026 Update: International Merchant Payments

UPI's acceptance footprint is also expanding internationally.

NPCI's UPI Global Acceptance functionality enables Indian users to make QR-based payments at selected international merchant locations using participating UPI-powered applications.

Customers can review the payment amount, currency and applicable exchange-rate or fee information before authorizing a transaction.

International acceptance involves additional considerations, so it should not be treated as identical to domestic P2M payments.

2026 Update: UPI Transaction Growth

UPI continues to process extremely large transaction volumes.

NPCI's published statistics show that in August 2026, UPI processed approximately 24.51 billion transactions, with transaction value of approximately ₹29.82 lakh crore. July 2026 recorded approximately 23.66 billion transactions with value of approximately ₹29.88 lakh crore.

The scale of these transactions helps explain why changes to UPI operating rules, merchant acceptance and payment economics can have broad effects across India's digital-payment ecosystem.

Does Every UPI Payment Have Zero MDR?

No broad statement should be made that every possible UPI payment has exactly the same zero-MDR treatment.

The relevant factors can include:

• Payment source
• Transaction category
• Merchant classification
• Payment instrument
• Applicable NPCI rules
• Applicable government policy
• Merchant size or category
• Domestic or international acceptance

For ordinary bank-account-based UPI merchant payments, the zero-MDR framework is central.

However, UPI-linked credit products and specialized payment arrangements can have different economics.

MDR vs UPI Transaction Charges

These terms are sometimes used interchangeably even though they describe different things.

A customer should not assume that a fee mentioned by a payment provider is necessarily MDR.

Can a Merchant Be Charged for UPI?

The answer depends on the type of UPI transaction and the applicable arrangement.

For standard account-to-account UPI merchant payments covered by the zero-MDR framework, merchants generally do not pay a conventional MDR.

However, other payment instruments or separately defined commercial arrangements can have different fee structures.

Businesses should therefore examine the actual payment instrument, acquiring arrangement and current applicable rules rather than relying on a generic statement about "UPI charges."

UPI Merchant Settlement

After a successful transaction, funds move through the UPI ecosystem and are ultimately settled to the merchant's designated account according to the applicable settlement process.

Settlement arrangements can depend on:

• Acquiring bank
• Payment aggregator
• Merchant account
• Transaction type
• Refunds
• Chargebacks
• Reconciliation requirements

Merchants should maintain accurate transaction records so that payments can be reconciled with their internal accounting systems.

Refunds and Disputes

A digital payment ecosystem also needs mechanisms for:

• Failed transactions
• Refunds
• Wrong-credit situations
• Chargebacks
• Customer complaints
• Merchant disputes
• Reconciliation

UPI uses established processes and systems for handling transaction disputes and issue resolution.

For example, NPCI's UPI framework has evolved through operating circulars covering fraud, wrong-credit chargebacks and dispute-resolution processes.

UPI Security Considerations

UPI transactions generally require customer authentication through a UPI PIN or another authorized mechanism depending on the payment flow.

NPCI advises users not to share their UPI PIN and notes that a UPI PIN is used to authorize bank transactions.

Important security practices include:

• Never share a UPI PIN
• Verify the recipient before authorizing
• Check the amount
• Confirm the merchant name
• Avoid unknown payment links
• Be cautious about remote-access requests
• Do not approve unexpected collect requests
• Use only trusted payment applications
• Report suspicious transactions promptly

Common Misunderstandings About MDR on UPI

"All UPI payments are completely free."

Not necessarily. The treatment depends on the payment arrangement and transaction type.

"Zero MDR means banks receive no payment-related revenue."

Zero MDR refers to the merchant-side MDR framework. It does not mean every participant in the ecosystem receives no compensation or that all transaction economics disappear.

"UPI and credit-card payments have the same MDR."

They can have different economics because the underlying payment instrument is different.

"P2M and P2P are the same."

No. P2P refers to person-to-person payments, while P2M refers to person-to-merchant payments.

"A QR code automatically means zero charges."

The QR itself does not determine the entire payment economics. The underlying payment method and transaction type matter.

How MDR on UPI Can Be Understood in Simple Terms

A useful way to understand the system is:

Standard bank-account UPI

Customer → Merchant

Typical merchant MDR: Zero under the applicable zero-MDR framework

Credit-linked UPI

Customer's eligible credit account → Merchant

Treatment: Can involve applicable interchange or other ecosystem arrangements

Specialized transactions

Business, international or other categories

Treatment: Depends on the relevant NPCI and regulatory framework

This simplified model helps avoid treating every UPI transaction as identical.

What Businesses Should Monitor in 2026

Businesses accepting UPI should keep track of:

• Current NPCI operating circulars
• Merchant classification
• QR requirements
• Payment aggregator terms
• Settlement arrangements
• Refund procedures
• Chargeback processes
• Fraud monitoring
• Transaction reconciliation
• Credit-based UPI acceptance
• International payment acceptance where relevant
• Applicable regulatory changes

Because NPCI continues to issue operating updates, businesses should rely on current official requirements rather than older articles or informal summaries.

Frequently Asked Questions

What does MDR mean in UPI?

MDR means Merchant Discount Rate. It generally refers to a merchant-side fee associated with payment acceptance. Standard account-based UPI merchant payments operate under a zero-MDR framework in the applicable circumstances.

What is P2M in UPI?

P2M means Person-to-Merchant. It describes a payment made by an individual to a merchant through UPI.

Is there MDR on normal UPI payments?

Ordinary bank-account-based UPI merchant payments generally operate under the zero-MDR framework. However, different UPI-linked payment instruments can have different economics.

Is UPI MDR the same as card MDR?

No. UPI account-based payments and card payments operate under different payment structures and fee arrangements.

Can RuPay credit cards be used through UPI?

Eligible RuPay credit cards can be linked to UPI under the applicable NPCI framework. The resulting transactions have rules and fee arrangements that differ from ordinary bank-account UPI payments.

What is the difference between P2P and P2M?

P2P is a payment between individuals, while P2M is a payment from an individual to a merchant.

What is P2PM?

P2PM is another UPI transaction category used for specified person-to-person-to-merchant payment arrangements.

Does UPI have transaction charges?

The answer depends on the transaction type and payment instrument. Standard account-based merchant UPI payments are covered by the zero-MDR framework, while specialized payment arrangements can have different applicable charges.

What are the major UPI updates in 2026?

The 2026 UPI ecosystem includes continuing NPCI operating changes involving merchant QR guidelines, fraud and chargeback processes, international merchant acceptance, authentication, numeric UPI IDs and other payment-system enhancements.

Where can current UPI rules be checked?

The most reliable sources are the Reserve Bank of India and NPCI, particularly current NPCI UPI circulars and official product documentation.

Conclusion

MDR on UPI is best understood by separating ordinary account-based UPI payments from other payment instruments and transaction categories.

P2M transactions represent payments from individuals to merchants, while P2P transactions involve transfers between individuals. Under India's zero-MDR framework, ordinary bank-account-based UPI merchant payments generally do not carry a conventional MDR for the merchant.

At the same time, UPI is a broad payment ecosystem rather than a single payment instrument. Credit-linked UPI transactions, international payments, specialized merchant categories and other transaction types can follow different rules and economic arrangements.

The 2026 environment continues to evolve through NPCI operating circulars and merchant-acceptance updates. QR requirements, authentication methods, dispute processes, international acceptance and other parts of the ecosystem are being refined as UPI expands.

For businesses and payment participants, the most reliable approach is to identify the exact transaction type and payment instrument and then check the latest applicable NPCI and RBI requirements.

Disclaimer

This article is provided for general informational and educational purposes only. UPI transaction processes, merchant charges, MDR arrangements, payment categories and regulatory requirements may vary depending on the transaction type, payment instrument, merchant category, participating entities and applicable rules. Regulations, fees, limits and operating guidelines may also change over time. Readers should refer to the latest information published by the Reserve Bank of India (RBI), National Payments Corporation of India (NPCI), banks and other relevant authorities before making financial or business decisions. This article does not constitute financial, legal, regulatory or professional advice and does not promote or recommend any particular payment provider, product or service.