76% UPI users may turn to cash, cards for payments above Rs 2,000 if MDR is charged

UPI’s zero-MDR model for merchants is set for a major change from October 15, with a 0.4% merchant discount rate (MDR) applying to person-to-merchant payments above Rs 2,000.

The government has said the charge should not be passed on to consumers. But a new LocalCircles survey indicates that if merchants do ask customers to pay extra, a large majority could switch to cash, cards or bank transfers.

Only 14% of UPI users surveyed said they would continue using UPI and absorb the additional cost. The rest said they would either choose another payment method, look for a fee-free option or avoid or postpone the purchase.

The survey collected more than 67,000 responses from UPI users across 291 districts. The specific question on how consumers would respond to an additional charge received 31,206 responses.

CASH AND CARDS COULD SEE A SHIFT

When asked what they would do if a merchant charged an additional fee on a UPI payment above Rs 2,000, 27% of respondents said they would pay in cash.

Credit cards were the second-most popular alternative, with 26% choosing them, followed by debit cards at 14%.

Another 4% said they would use bank transfers such as NEFT or IMPS, while 9% would ask the merchant for another payment option without an extra charge.

Only 14% said they would continue using UPI and pay the additional amount. Two% said they would avoid or delay the purchase, while 4% were undecided.

The findings suggest that even a relatively small additional cost could influence payment behaviour, particularly for higher-value purchases.

76% MAY SHIFT LARGE PAYMENTS FROM UPI

The survey also looked at longer-term preferences if UPI payments above Rs 2,000 carried an additional cost.

Of 37,654 respondents, 26% said they would use credit cards most often, while another 26% would turn to cash. Debit cards accounted for 13%, and 11% said they would use bank transfers, NEFT or IMPS.

Only 20% said UPI would remain their preferred payment method for purchases above Rs 2,000 if it involved an additional charge. Four% were unsure.

In effect, 76% of respondents indicated they could move larger payments away from UPI if using it became more expensive.

Cards together accounted for 39% of the alternatives, while cash accounted for 26%.

WHAT IS MDR?

MDR, or merchant discount rate, is a fee associated with digital payment transactions that is distributed among banks, payment service providers and other participants in the payment ecosystem.

UPI transactions have so far operated under a zero-MDR model for merchants. From October 15, a 0.4% MDR will apply to eligible person-to-merchant UPI payments above Rs 2,000.

The government has stressed that this is not a charge that consumers are required to pay.

The Finance Ministry has said MDR is “neither a tax nor a charge collected by Government or NPCI”. Banks have also been directed to ensure merchants do not pass the cost on to customers, while UPI apps cannot impose platform fees or hidden charges.

The uncertainty lies in how merchants respond to the new cost.

NOT ALL UPI PAYMENTS WILL BE AFFECTED

The new MDR does not apply to every UPI transaction.

Payments of up to Rs 2,000 remain outside the charge, while person-to-person transfers continue to be free.

Small merchants receiving up to Rs 1 lakh a month through UPI QR codes are also exempt. The government has said around 96% of merchant transactions will remain unaffected.

The change is therefore concentrated on larger person-to-merchant payments, including purchases such as electronics, household goods, restaurant bills, travel and shopping.

The value involved is significant. UPI processed a record 24.51 billion transactions worth Rs 29.82 lakh crore in August 2026, according to the survey release.

Merchant payments accounted for 15.51 billion transactions worth Rs 8.95 lakh crore. Transactions above Rs 2,000 represented 67% of the value of those merchant payments.

That means the MDR will cover a relatively smaller share of transactions by volume but a much larger share of merchant payment value.

MERCHANTS ARE ALSO RELUCTANT

Consumer behaviour is only one side of the equation. Merchants themselves have expressed reservations about absorbing the new fee.

A separate LocalCircles survey of more than 32,000 businesses across 242 districts found that only 17% were willing to bear a 0.4% MDR on UPI payments above Rs 2,000.

Forty-one% said they would not bear any MDR, while 9% said they did not accept UPI.

Among merchants who were willing to accept an MDR, 0.04% was the most commonly preferred ceiling, selected by 15% of respondents.

This could create a practical challenge for implementation: while the government says the MDR should not be passed on to consumers, many merchants surveyed said they were unwilling to absorb it themselves.

WHAT DOES 0.4% MEAN FOR A PAYMENT?

The MDR rate may look modest, but the amount increases with the transaction value.

A 0.4% MDR on a Rs 5,000 payment would amount to Rs 20. On a Rs 50,000 transaction, it would be Rs 200.

An 18% GST is also levied on the MDR, although merchants can claim input tax credit, according to the survey release.

For consumers, however, the bigger issue could be the introduction of any additional cost for a payment method that has traditionally been free.

An earlier LocalCircles survey in August, involving more than 45,000 UPI users across 322 districts, found that 53% said they would move away from UPI for larger payments if the MDR was passed on to them.

In March 2025, another LocalCircles survey found that 73% of UPI users believed there should be no charge on UPI transactions.

WHAT HAPPENS FROM OCTOBER 15?

The government has maintained that customers should not bear the MDR.

Finance Minister Nirmala Sitharaman said on September 22 that “the responsibility does not lie with the customer” and that the MDR would not be transferred to consumers, according to the LocalCircles release.

The Finance Ministry is working with the Indian Banks’ Association on a mechanism to monitor merchants and prevent the charge from being passed on. An awareness campaign in regional languages is also planned to make consumers aware that they are not required to pay an additional UPI fee.

However, LocalCircles said the framework does not yet specify clear penalties or a refund mechanism for consumers who are wrongly charged.

That makes the October 15 rollout a significant test for India’s digital payments ecosystem. The official position is that consumers should not pay the MDR, but if merchants attempt to recover the cost, the survey suggests many users could respond by taking larger payments to cash, cards or bank transfers.