UPI charges to apply from October 15; new rule for payments above ₹2,000—will Gen Z face increased anxiety?

Starting October 15, 2026, a 0.4% MDR (Merchant Discount Rate) will apply to select UPI merchant payments exceeding ₹2,000. While this charge will not be levied directly on the customer, it could lead to situations where people opt for cash or cards for larger payments. Here is how this new rule might impact UPI users, particularly the payment habits of Gen Z.

A new system for UPI payments will come into effect on October 15. A 0.4% MDR—essentially a processing charge—will apply to certain business payments exceeding ₹2,000. However, the government has stated that this charge will not be passed on directly to the customer. MDR will not apply to business payments of up to ₹2,000 or to person-to-person (P2P) UPI transactions. According to the government, approximately 96% of merchant UPI payments will remain outside the scope of this rule.

What will be the impact on Gen Z?

The impact of this new rule is likely to be most visible in larger transactions. UPI has become an integral part of daily life for Gen Z; if merchants pass this cost on to customers, young people might choose cash or cards over UPI for higher-value payments.

What is MDR?

MDR stands for Merchant Discount Rate. Simply put, it is the processing fee charged to shopkeepers or merchants for accepting digital payments. It represents a small percentage of the transaction amount. This fee is paid by the merchant, not the customer, and the amount is shared among banks, payment gateways, and card networks.

Insights from LocalCircles

This is precisely where potential issues for UPI users could arise. Currently, most people do not consider which payment method is more cost-effective when making a transaction; they simply scan the QR code, pull out their phone, and make the payment. However, if the issue of additional charges on large payments arises, users will also have the option to use cash or cards.

A LocalCircles survey asked over 31,000 UPI users what they would do if merchants charged extra for payments exceeding ₹2,000. 27% of respondents said they would use cash, while 26% opted for credit cards. 13% mentioned switching to debit cards, and 11% spoke of using bank transfers. Only 14% stated they would continue using UPI despite the charges. However, this survey is based on a hypothetical scenario; it does not imply that such a large number of people will abandon UPI after October 15.

Gen Z May Have to Get Used to Carrying Cash

The UPI story is somewhat different for Gen Z. This generation began using UPI not after cash, but alongside it—or in many cases, even before it. Whether sending ₹80 to a friend, splitting a ₹450 café bill, or making an online purchase, they simply pull out their phones and complete the payment.

For many young people, carrying cash no longer feels necessary. Consequently, if they need to choose cards or cash over UPI for large payments, it won’t just be a change in payment method; they might have to cultivate the habit of carrying cash and cards again, and checking which option is cheaper before making a payment.

UPI Has Become a Daily Habit

UPI hasn’t just changed the habits of Gen Z; there are millions of users who have made the transition from cash to UPI. Previously, it felt essential to keep ₹500 or ₹1,000 in one’s pocket at the start of the month. Now, cash is withdrawn from ATMs only when needed.

For these users, UPI has also eliminated minor daily hassles. There is no need to carry loose change, hunt for the exact note to repay a friend ₹47, or count cash at a shop counter. That is why UPI is no longer just an app or a payment method; it has become a daily habit.

No MDR on merchant payments up to ₹2,000

Small purchases are not currently a major concern, as no MDR (Merchant Discount Rate) will be charged on merchant payments of up to ₹2,000. However, for larger transactions—such as buying mobile phones, electronics, or clothes, or paying for hotels, hospitals, and other expensive items—users might face a dilemma: should they use UPI or opt for cards or cash?

If the merchant absorbs the MDR cost, the customer might not notice any difference. But if this cost is passed on to the customer or a separate charge is levied at the time of payment, the user might choose an alternative. This could impact UPI’s greatest strength—the sheer ease of simply scanning a QR code to make a payment.

No permission to charge MDR directly to the customer

It is too early to say whether the introduction of MDR will cause people to abandon UPI and revert to cash or cards. According to the government, most merchant payments will remain unaffected, and merchants are not permitted to charge the MDR directly to the customer.

However, user behavior regarding large payments will be interesting to observe—especially among Gen Z, for whom carrying cash feels like an outdated habit, while UPI is an integral part of daily life.

The issue is not merely about a charge of ₹12 or ₹20. The real question is whether a generation that has learned to pull out a phone rather than cash from their pocket to make payments will…