The National Payments Corporation of India (NPCI) has proposed a dedicated fund financed from Merchant Discount Rate (MDR) collections to support small merchants and expand digital payment infrastructure in smaller cities, as India prepares to introduce MDR on select UPI transactions from October 15.

The fund will support merchant onboarding, encourage higher UPI transaction volumes among existing small merchants and help build digital payment infrastructure across Tier 3 to Tier 6 centres. It will also support notified Central government schemes, according to NPCI's framework.

The proposal comes alongside the introduction of a 0.4% MDR on select person-to-merchant (P2M) UPI transactions above Rs 2,000. The charge will be capped at Rs 300 for transactions of Rs 75,000 and above. Consumers will not pay the MDR, while person-to-person (P2P) transactions will continue to remain free.

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How will the dedicated fund work?

NPCI has said the fund will provide financial assistance to ecosystem players for merchant onboarding and encouraging UPI usage among existing small merchants. It will also support digital payment infrastructure in Tier 3 to Tier 6 locations, including the Northeast, Jammu & Kashmir and Ladakh.

The fund will also cover notified Central government schemes in other locations. NPCI is expected to finalise its detailed framework in consultation with the Reserve Bank of India within three months.

An amount equivalent to 5% of total MDR collections will be contributed to the fund. The proposal is aimed at expanding digital acceptance in smaller centres while keeping eligible small merchants protected from MDR.

UPI has operated under a zero-MDR regime since January 2020, when the government introduced the framework to encourage digital-payment adoption. The new MDR framework is intended to provide a more sustainable revenue model as the payment network continues to expand.

UPI processed 2,451 crore transactions worth Rs 29.9 lakh crore in August 2026, highlighting the scale of the infrastructure that banks, payment apps and other ecosystem players have to maintain. Industry estimates cited by ET put the annual cost of running UPI infrastructure at around Rs 20,000 crore.

The MDR collected will be distributed among participants in the UPI ecosystem and will help support areas such as payment infrastructure, cybersecurity, fraud prevention and customer service.

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MDR is not a charge imposed on consumers. The applicable charges are levied on eligible merchant transactions within the payment ecosystem.

The new framework keeps small merchants under the P2PM category outside MDR. Merchants receiving up to Rs 1 lakh a month through UPI QR codes will continue to enjoy zero MDR, according to NPCI's framework.

Transactions of up to Rs 2,000 will also remain free. The Finance Ministry has said approximately 96% of P2M transactions will remain unaffected by the new MDR framework.

This means the new MDR will primarily apply to higher-value merchant payments rather than everyday low-value UPI transactions.

The Finance Ministry has said the framework is intended to support the long-term sustainability of UPI while helping expand digital payments in rural and semi-urban areas.

The proposed fund therefore connects MDR collections from eligible higher-value merchant payments with efforts to bring more small merchants into the digital-payment ecosystem and strengthen infrastructure in less-served parts of the country.