The Indian finance ministry announced on Tuesday that a 0.4% merchant discount rate (MDR) will be levied on Unified Payments Interface (UPI) transactions to merchants that exceed ₹2,000, starting 15 October. The policy explicitly excludes everyday person‑to‑person (P2P) transfers and small‑value payments, which will remain free of charge.
Details of the new merchant discount rate
According to the ministry’s statement, the charge applies solely to person‑to‑merchant (P2M) payments above the ₹2,000 threshold. The fee is capped at ₹300 for transactions of ₹75,000 or more. Essential services such as railways, telecom, insurance, fuel and agricultural inputs will face a flat fee of ₹5 per transaction above ₹2,000, a measure intended to keep costs predictable for critical sectors that together represent about 17% of transaction volume but roughly 46% of value.
Government‑related utilities – electricity, water, piped gas – and educational fee collections (school tuition and university fees) above ₹2,000 will also be subject to the flat‑fee structure. Payments into mutual funds, securities and through stock‑brokers will attract a lighter 0.02% MDR, also capped at ₹300, to keep investing costs low and encourage retail participation.
Person‑to‑person transfers, which account for 37% of UPI’s transaction volume and 70% of its value, will continue to be charge‑free regardless of amount. Small‑value P2M transactions up to ₹2,000 – which the ministry says constitute more than 95% of total P2M volume – are also exempt.
Market reaction and stock movements
Following the announcement, shares of several payment‑technology firms and banks rose on Wednesday, 16 September. One 97 Communications, the parent company of Paytm, climbed 1.24% to ₹1,751.40 on the National Stock Exchange, touching a 52‑week high of ₹1,855.50 and up 7.25% from the prior close of ₹1,730.
Banking stocks also posted gains. YES Bank’s shares surged 3.34% to ₹23.84, while State Bank of India advanced just over 1% to ₹979. Bank of Baroda added a modest 0.24% increase, trading at ₹233.25.
Other payment players such as Mobikwik and Pine Labs were reported to be trading in the green, reflecting investor optimism that the new MDR will open a fresh revenue stream for entities that process large merchant payments.
Analyst projections and revenue outlook
Market analysts have broadly welcomed the re‑introduction of an MDR on eligible UPI transactions, describing it as a long‑awaited monetisation event for the payments ecosystem. Citi estimates that the framework could generate an incremental revenue pool of roughly ₹16,000‑₹17,000 crore per year. The bank expects about 60% of that amount to flow to banks, 25% to UPI app providers and the remaining 15% to non‑bank payment aggregators.
Citi highlights YES Bank as a prime beneficiary, given its sizable share of UPI beneficiary volumes. The firm projects a potential boost of 5‑10% to the bank’s pre‑provision operating profit (PPOP) and 6‑12% to profit before tax (PBT). Bank of Baroda, Punjab National Bank and IndusInd Bank could see around a 2% impact on PBT, while Axis Bank, SBI and Federal Bank might experience a 1‑2% uplift.
Goldman Sachs sees a material earnings upgrade for payment companies, estimating a 40‑70% upside to its FY28 EBITDA forecasts for Paytm. The investment bank notes that the 40‑basis‑point MDR is higher than the 20‑30 bps it previously modeled. Based on NPCI data, Goldman calculates that roughly half of overall UPI transaction value could fall under the 40‑bps category, creating an industry‑wide revenue pool of about ₹20,600 crore. In a high‑end scenario, the bank projects an incremental ₹1,400 crore EBITDA for Paytm in FY28.
JPMorgan also views the move positively, estimating the total maximum revenue pool at around ₹17,000 crore. Of that, the firm expects roughly ₹11,700 crore to accrue to banks via issuer and acquirer channels – an amount equivalent to about 2.1% of FY26 net profit for listed commercial banks. JPMorgan further allocates about ₹1,700 crore to payer platform service providers (PSPs) and ₹3,400 crore to third‑party application providers (TPAPs). The brokerage notes that mid‑tier banks such as YES Bank stand to gain disproportionately because of their deeper exposure to the UPI ecosystem.
Overall, the consensus among analysts is that the new MDR framework will create a sizable, recurring revenue source for both banks and payment‑service providers, while preserving the zero‑cost nature of small‑value and peer‑to‑peer transactions that have driven UPI’s rapid adoption.
In its statement, the finance ministry emphasized that the MDR is a charge within the merchant payment ecosystem and not a cost borne by end‑users. It reiterated that customers will continue to enjoy unlimited free usage of UPI with no monthly quotas, volume caps or tiered limits.
The introduction of the fee comes as the Indian government seeks to balance revenue generation with the goal of keeping digital payments affordable for the masses. By targeting higher‑value merchant transactions and shielding low‑value and person‑to‑person payments, policymakers aim to protect the inclusive nature of UPI while unlocking new earnings potential for banks and fintech firms alike.
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