From October 15, a 0.4 per cent merchant discount rate (MDR) will apply to eligible person-to-merchant (P2M) UPI transactions above ₹2,000. However, small merchants classified under the person-to-person-merchant (P2PM) framework will continue to get zero MDR. This exemption applies even if a customer makes a single payment of more than ₹2,000.
But how do you know whether your business falls under the P2PM category or the regular P2M category?
Are you classified as a P2PM merchant?
P2PM stands for Person-to-Person-Merchant. It is a special account category created by the National Payments Corporation of India (NPCI) for small vendors who receive UPI payments directly into their bank accounts.
Under the framework, small merchants receiving up to ₹1 lakh a month through UPI QR codes can qualify for zero MDR. The category is aimed at micro-businesses and vendors in the unorganised retail sector who may not operate through formal commercial merchant accounts.
The classification is handled through the merchant’s bank or payment service provider. A small vendor does not need to have a GST registration to qualify for zero MDR under the P2PM category.
In simple terms, if your bank or payment service provider has classified your account as P2PM and your monthly UPI collections remain within the prescribed limit, the new MDR will not apply to you.
What if a customer pays you more than ₹2,000?
The ₹2,000 threshold does not mean that every individual UPI payment above this amount will automatically attract MDR. For a merchant classified as P2PM, receiving a single payment of ₹3,000 or ₹5,000 does not by itself make the transaction chargeable. MDR applicability depends on the overall categorisation of the merchant account rather than simply the amount of one payment.
For example, if a small shopkeeper is classified as P2PM and a customer pays ₹3,000 through UPI, the merchant does not automatically have to pay 0.4 per cent MDR on that transaction.
The 0.4 per cent MDR applies to eligible P2M transactions above ₹2,000.
When can a small merchant move into the MDR-paying category?
Banks and payment service providers monitor the UPI collections of merchants operating under the P2PM category. If a merchant’s inward UPI payments exceed ₹1 lakh a month for three consecutive months, the merchant is formally moved from the P2PM category to the P2M category.
This means crossing the ₹1 lakh threshold in just one month does not automatically result in a change in classification.
For instance, suppose a shopkeeper receives ₹90,000 through UPI in the first month, ₹1.05 lakh in the second month and ₹1.10 lakh in the third month. Since the merchant has not crossed ₹1 lakh for three consecutive months, the three-month migration condition has not been met.
If UPI collections remain above ₹1 lakh for three straight months, however, the merchant can be moved to the P2M category. Once classified as P2M, eligible UPI payments above ₹2,000 can attract MDR.
If you are a P2M merchant, how much will you pay?
For merchants covered by the P2M framework, the MDR structure is:
• UPI payment up to ₹2,000: No MDR
• UPI payment above ₹2,000: 0.4 per cent MDR
• UPI payment of ₹75,000 or more: MDR capped at ₹300 per transaction
Photo: AI-generated image
The framework also provides for a flat MDR of ₹5 per transaction for certain categories, including railways, telecom services, insurance and fuel, for transactions above ₹2,000.
Merchants are not allowed to pass the MDR on to customers. The buyer therefore continues to pay the listed price, while the applicable MDR is borne by the merchant. However, if a small merchant transitions to the P2M category, it doesn’t mean that he will pay MDR on UPI payments by default. The merchant will pay MDR on transactions above ₹2,000. If any of the individual transaction does not cross the ₹2,000 threshold, the merchant pays no MDR whether his monthly UPI-related transactions cross ₹1 lakh or ₹10 lakh.
Do you need a new QR code or registration?
No. Small merchants do not need to replace their existing UPI QR codes because of the new MDR framework. Existing QR codes and soundboxes will continue to work. Merchants do not need to re-register their QR codes, replace their physical QR stands or visit a bank branch merely because of the new rules.
GST registration is also not required to qualify for zero MDR under the P2PM category. Eligibility is based on the merchant’s account classification and the applicable monthly UPI collection threshold.
The same zero-MDR treatment applies to eligible P2PM merchants accepting QR-code payments in rural and semi-urban areas.
What should small shopkeepers do?
For small merchants, the size of one UPI payment will not decide whether MDR will be charged. The merchant’s account classification and monthly UPI collections are important.
If you are unsure whether your account is classified as P2PM or P2M, check with your acquiring bank or payment service provider before October 15. They can confirm the category under which your UPI QR account is operating and whether the new MDR rules apply to your transactions.
