New UPI charges: what changes for your QR payments, SIPs and mutual fund investments

While the new MDR introduces another cost for UPI investments, a mutual fund investor will not directly pay the fee or see it deducted from the investment amount.

From 15 October, some transactions on the unified payments interface (UPI) will attract a merchant discount rate (MDR)–a fee a merchant pays to the payments ecosystem for processing a digital payment.

An MDR of 0.4% will apply to person-to-merchant (P2M) UPI transactions above ₹2,000, capped at ₹300. But you will not be charged any extra fee for using UPI. If your bill at a supermarket comes to ₹3,000, you scan the QR code and pay ₹3,000 as usual. The merchant, however, will pay an MDR of ₹12, or 0.4%, to its bank.

This is not a blanket cost with some categories attracting a lower fee. Railways, telecom, insurance, credit card bills and fuel will attract a flat MDR of ₹5 for transactions above ₹2,000. Capital-market transactions, including mutual funds, securities and brokers, will attract an MDR of 0.02%. These, too, are capped at ₹300.

Person-to-person (P2P) payments will not attract any fee and will continue to be free. So, when you transfer money to a friend, or pay your local vendor on their UPI app directly, the transaction will remain free as long as the payment is being made to an individual account and is classified as a P2P transaction.

Who is actually charged?

Suppose you purchase groceries worth ₹5,000 at your local kirana store by scanning the shop's QR code. While you still pay ₹5,000, the store will incur an MDR of ₹20, or 0.4% of the transaction amount. This ₹20 is divided among the companies that enable the payment.

Under the framework, the kirana store will pay the full 0.4% to its acquiring bank—the bank that enables it to accept the UPI payments. From this pool, the acquiring bank gets 0.12%, the bank that issued the customer's account gets 0.16%, the customer's payment service provider gets 0.04% and the UPI app provider gets 0.08%.

A customer is typically outside the MDR flow.

Will the merchants pass on the cost to you?

The NPCI notification specifically says, “UPI App providers shall NOT charge Platform Fee or any other charge for any payment made through UPI. UPI applications are explicitly restricted from levying platform fees on UPI transactions.”

Industry stakeholders also believe merchants are unlikely to pass the MDR cost on to customers, given that they already absorb higher charges on other payment modes.

“A typical credit card MDR ranges between 1.5% to 2.5% while that of debit cards is around 0.9% per transaction. It is highly unlikely that merchants will pass the UPI MDR cost on to customers, as the rate remains very low,” said Reeju Datta, co-founder, Cashfree, a payment gateway. “Since most merchants already absorb higher MDRs on credit and debit cards, passing on the significantly lower UPI MDR is improbable,” Dutta added.

However, over time, businesses could factor payment-processing costs into their overall pricing, just as they do with other operating expenses. But the MDR itself cannot be passed on as an additional UPI charge at checkout, as per a statement from the finance ministry. “Banks have been advised to ensure that merchants do not pass MDR charges on to customers.”

Details on how banks will monitor and enforce this are not specified.

In a relief to very small merchants, vendors classified as P2PM—those receiving up to ₹1 lakh a month through UPI QR payments—will continue to pay zero MDR. Each transaction of up to ₹2,000 will also remain exempt from MDR across merchants, which account for more than 95% of all UPI P2M transactions, according to the NPCI framework.

With these caps, experts say the new MDR touches a small slice of UPI's merchant payments. “Government data indicates that around 96% of merchant transactions will remain unaffected, either because they are below ₹2,000 or are covered by the zero-MDR framework for small merchants. For this vast majority, UPI remains free,” said Adhil Shetty, CEO, BankBazaar.com.

For mutual fund investors, the 0.02% (0.0236% including GST) MDR will apply to eligible lump-sum investments made through UPI. However, UPI AutoPay mandates, commonly used for systematic investment plans (SIPs), are exempt from the charge. The NPCI FAQ specifically said all automated recurring payments, including recurring investments, will not attract the MDR. “...automated recurring standing instructions, known as UPI Mandates or AutoPay, do not carry prescribed MDR transaction charges,” the notification said.

An MDR of 2 basis points (bps) will be levied on lump-sum investments and will be included in the base expense ratio (BRE). But, can it reduce the number of adjusted units that you will be allotted? Experts say for most schemes it won’t.

Vashistha Iyer, executive director at Capitalmind Mutual Fund, explained that AMCs can absorb transaction costs of up to 2 bps on their books, but beyond that, the AMC has to charge it to the scheme. “It will depend on how an AMC chooses to account for the additional cost. It could absorb the MDR by reducing its management fee while keeping the scheme's BER unchanged, or factor the additional cost into BER.”

The impact will also vary significantly across schemes, depending on the scheme type, the proportion of lumpsum investments coming through UPI and their existing BERs.

Low-cost schemes like liquid funds, arbitrage funds and passive funds could feel the cost more than others. Many index funds operate with expense ratios of just 0.05-0.15%, making a 0.02% transaction cost relatively significant, said Iyer. “The biggest impact would be on low-cost passive products, like passive index funds. It hurts their unit economics the most.”

However, the actual impact could be limited if only a small proportion of a fund's inflows come through UPI. For example, volumes through UPI for liquid funds are minuscule, as inflows mainly come from corporates.

AMCs also already incur costs for processing investments through other payment modes. According to Iyer, net-banking transactions can cost around ₹13-14 each, while payment aggregators currently charge around ₹1-3 for UPI transactions.

So, while the new MDR introduces another cost for UPI investments, an investor will not directly pay the fee or see it deducted from the investment amount. Therefore, the incremental cost of the new MDR will ultimately depend on the transaction size and the MF scheme's existing cost structure.