The government decision to levy 0.4% fee on Rs 2,000 plus transactions made to merchants via UPI has triggered a debate around objectives of the move and whether this will harm consumers.Here’s an explainer on what the move effective from October 15 entails.What is changingIndia so far has a zero fee regime on UPI transactions but from October 15, 0.4 % Merchant Discount Rate (MDR) will be introduced on UPI transactions worth over Rs 2,000 to merchants: MDR on transactions of Rs 75,000 and above will be capped at Rs 300.Why bring MDR nowBanks and financial institutions have long been flagging the zero MDR regime as unsustainable.UPI processes billions of transactions every month. The MDR is distributed only amongst the UPI ecosystem to further invest into infrastructure resiliency, innovation, cybersecurity and customer service.How does the fee compare with other leviesUPI MDR is structured to be much lower than all traditional card-based transaction fees. Standard credit card MDRs typically range from 1.5% to 2.5% per transaction, while debit card MDRs are capped up to 0.90%. By setting the baseline UPI MDR at 0.4% on transactionabove Rs 2,000 and capping it at Rs 300 for high-value purchases, UPI remains the most affordable digital payment acceptance tool for commercial enterprises. This cost difference helps merchants lower their payment processing expenses while accepting digital transactions.Will small-value UPI transactions be impactedNo, there will be no fee on small-value UPI transactions up to Rs 2,000, which comprise more than 95% of the total volume of UPI (P2M) transactions. Government says the intent of levying reasonable MDR is to ensure that UPI remains accessible and convenient for everyday transactions while supporting long-term ecosystem sustainability.When do updated MDR provisions take effectFrom October 15 and this timeline, government says, gives acquiring banks, payment aggregators, fintech applications, and corporate accounting platforms adequate lead time to update their software engines and billing systems.India MDR versus the worldMost global payment systems (including Digital Public Infrastructures) have economic models that support infrastructure and innovation. India’s approach continues to prioritise accessibility, scale and inclusion.Who decides ultimate implementation and enforcement of MDR capsThe operational parameters, fee distribution models, and category caps are decided by the UPI steering committee headed by the National Payments Corporation of India (NPCI).Does government collect the feeFinance ministry says MDR is neither a tax nor a charge collected by the Government or National Payments Corporation of India. It is distributed among payment ecosystem participants, including banks and payment application providers, to support the operation and continued expansion of the UPI ecosystem.What’s proposed dedicated fund for small merchantA dedicated fund will be established to subsidise and accelerate digital payment infrastructure in Tier 3 centres including NE states, J&K and Ladakh and in Tier 1 & 2 centres, any notified Scheme from Central Government shall also be included (such as PM SVANidhi, PM Vishwakarma etc.). This fund will also be utilised to extend financial assistance to the ecosystem players for merchant onboarding and incentivize growth of UPI transactions among existing small merchants.The fund will support the expansion of UPI acceptance among small merchants by providing financial assistance to acquiring banks/ payment aggregators for merchant onboarding initiatives and providing incentives for UPI transactions originating from small merchants, particularly in rural areas, Tier 3 centres and beyond.What will remain freeAll person-to-person (P2P) UPI transactions will remain completely free, irrespective of the amount transferred. No transaction fee, platform fee or other charge may be imposed on individuals for sending or receiving money through UPI. Therefore, UPI transactions accounting for 70% of the total transaction value will remain completely outside the MDR framework.All person-to-merchant (P2M) transactions up to Rs 2,000 will remain free of MDR. Customers will not be required to pay any charge when making such payments through UPI.Small merchants including street vendors receiving up to Rs 1 lakh per month through UPI QR codes under the Person-to-Person-Merchant (P2PM) category will continue to enjoy zero MDR on all transactions. This provision will protect street vendors, neighbourhood shops and other small businesses from additional payment costs.