NCP (SP) demands cancellation of 0.4% MDR commission for UPI transactions, calling it an attack on small traders

Nithana Kamath from Zerodha has pointed out a potential issue related to the new Merchant Discount Rate (MDR) mechanism for UPI, which will come into effect on October 15. He noted that this system could lead to financial difficulties for brokerage firms.

Kamath indicated that the MDR structure designed for regular merchants is unsuitable for businesses such as investment and brokerage services. Under the new framework introduced by the government for the UPI ecosystem, a commission of 0.4% will be charged on certain UPI payments exceeding ₹2000. Meanwhile, UPI remains free for end-users, and the MDR fee applies to the payment receiver within the ecosystem.

Kamath stated on social media platform X that while widespread use of UPI may necessitate the introduction of MDR, the existing model is impractical for the fields of investment and brokerage services. He emphasized the significant difference between a regular merchant and a broker.

He illustrated this with an example: when a customer buys an item worth ₹20,000 and pays via UPI, the seller receives income directly from the transaction. However, in the case of a broker, a client might deposit ₹200,000 into a trading account but not execute any trades that day. In this scenario, the broker does not earn trading income but could face MDR expenses related to the UPI payment. This is the point Kamath raised.

To illustrate potential costs, the Zerodha founder provided an example. He hypothesized that if 10,000 clients make 50-50 transfers of ₹200,000 over a month without executing any trades, MDR costs could reach approximately ₹20 million at a rate of 0.02%. Kamath used this example to show that a broker could incur significant losses from MDR charges simply due to frequent fund transfers without making trades.

Furthermore, Kamath mentioned the quarterly SEBI settlement system, under which brokers must return unused funds to clients for a specific period. The client can then re-send these funds to their brokerage account. Kamath noted that more than half of these transfers occur via UPI, creating a money movement cycle: from bank to broker, then to client, and back to the broker. If an MDR fee is charged for each such transfer, the broker's expenses could increase even without trades.

Kamath reported that Zerodha currently does not charge a commission for delivery stock trades. He stated that the current business model allows for cost coverage. Nevertheless, if a separate fee is levied for every UPI transfer, regardless of whether the client executes a trade, maintaining these costs in the long term could become challenging. It is important to note that Kamath only expressed concern about potential costs, not announced any changes to his commission.

Kamath is not against the MDR system in general. He insists on the need for a separate fee structure for brokerage activities. He proposed setting the MDR around 0.02% with a maximum limit of ₹5 or ₹10 per transaction. In comparison, the new framework provides for an MDR of 0.4%, and the maximum fee for payments of ₹75,000 or more is set at ₹300.

Changes to UPI rules regarding commissions will take effect on October 15. It is important to know who bears the costs, what changes will occur for UPI payments, and who exactly will pay the new commission.

Starting from October 15, 2026, certain merchants will be required to pay MDR for some UPI payments exceeding the amount of 2000 rupees. This commission is borne by the merchant, not the end-user.

MDR (Merchant Discount Rate) is a fee charged to eligible merchants for accepting certain UPI payments. The standard MDR starting October 15 will be 0.4% for payments from eligible merchants exceeding 2000 rupees.

Peer-to-peer (P2P) payments remain completely free regardless of the amount, and no new monthly limits or quotas for free use are introduced for private individuals.

The new MDR applies to standard peer-to-merchant (P2M) payments. For amounts above 2000 rupees, an MDR of 0.4% will apply. For transactions of 75,000 rupees or more, the MDR is capped at 300 rupees.

For essential services such as fuel, railways, telecommunications, insurance, and utilities, the MDR is a fixed amount of 5 rupees for relevant payments exceeding 2000 rupees. Regarding mutual funds, securities, brokers, and dealers, the MDR rate is 0.02%, with a limit of 300 rupees.

Small merchants receiving up to 100,000 rupees per month via UPI QR code continue to benefit from zero MDR. However, if they exceed this amount for three consecutive months, they transition to the regular P2M category.

It is important to emphasize that the merchant pays the commission, not the customer. Banks have been advised to ensure that merchants do not pass the MDR onto buyers. Furthermore, UPI applications are prohibited from imposing platform fees or hidden charges within this system.

The UPI system is large and requires operational costs. The new structure is intended to support the development of payment infrastructure, cybersecurity, fraud prevention, innovation, and customer service.

NPCI has introduced changes to the UPI rules. A new Merchant Discount Rate (MDR) structure will be implemented starting October 15 for transactions with selected merchants using UPI.

Under the new rules, a commission of 0.4% will be charged for payments exceeding 2000 rupees. Furthermore, the maximum fee for any transaction will be around 300 rupees.

For transactions amounting to 75000 rupees or more, the maximum MDR per transaction is also set at 300 rupees. However, customers will not pay any fees when making payments up to 2000 rupees.