UPI MDR Loophole
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The Great Indian Payment Shuffle: How Merchants Are Gaming the System
India’s Unified Payments Interface (UPI) is expanding rapidly, but a new layer of complexity has emerged with merchants finding creative ways to avoid merchant discount rates (MDRs). In October 2026, regulations will introduce a 0.4% MDR on UPI payments above Rs 2,000 made to large merchants.
The most obvious example is the “Rs 2,000 trick,” where a merchant receives three separate payments of Rs 2,000 each instead of one lump sum payment of Rs 6,000. This allows them to avoid the MDR while collecting their due amount from the customer. However, this highlights a larger issue: the lack of clarity in regulations surrounding multiple UPI payments.
Currently, there are no daily caps on repeated UPI payments made to the same merchant, which has led some entrepreneurs to explore this loophole. Industry estimates suggest that transactions above Rs 2,000 represent around two-thirds of the total value of merchant payments, meaning widespread attempts to avoid charges could have a significant impact on collections.
Another area where merchants are finding workarounds is in the zero-MDR person-to-person-merchant (P2PM) category. By distributing their receipts across different bank accounts, QR codes or payment service providers, they can potentially keep each one below the prescribed threshold of Rs 1 lakh per month for three consecutive months.
This requires banks and payment service providers to link these accounts and channels to the same business, which is a tall order. The gray area surrounding commercial receipts being presented as personal transfers also raises questions about accountability. If merchants direct business payments to personal UPI IDs, it could be misclassified as a legitimate exemption.
Banks or payment providers would need to reclassify the account, but this would require significant effort and resources. While some may view these workarounds as minor annoyances, they highlight deeper issues with India’s payments infrastructure.
The National Payments Corporation of India (NPCI) is trying to strike a balance between supporting UPI growth and preventing abuse, but it’s clear that more clarity and regulation are needed. Without it, merchants will continue to find creative ways to game the system.
In the long run, this could have far-reaching consequences for the Indian economy. Widespread attempts to avoid charges could lead to a loss of revenue for UPI infrastructure, cybersecurity, and customer service – areas crucial for the platform’s continued growth.
The NPCI has stated that MDR revenue will be used to support these initiatives, but if merchants continue to find ways around the system, it’s unclear how this revenue stream will remain stable. This is not just a problem for UPI, but also for India’s broader payments ecosystem.
As the new framework comes into effect in October 2026, one thing is clear: Indian merchants are resourceful when it comes to finding creative solutions to problems. While some may view these workarounds as clever exploits, they also highlight the need for greater clarity and regulation in India’s payments landscape.
Reader Views
- TIThe Ink Desk · editorial
The UPI MDR loophole highlights a fundamental issue with India's cashless payment system: its lack of robustness. While regulations are in place to deter merchants from gaming the system, the current structure is vulnerable to manipulation. One area that warrants closer scrutiny is the potential for money laundering and tax evasion through these workarounds. As long as there are gray areas in the regulatory framework, entrepreneurs will continue to find creative ways to exploit them, raising questions about the efficacy of India's financial oversight bodies.
- MPMira P. · comics critic
The UPI MDR loophole is less about creative merchants and more about regulatory failure. The Rs 2,000 trick exploits a clear omission in the rules – the absence of daily caps on multiple payments to the same merchant. This lacuna isn't just a minor technicality; it's a sign that India's payment landscape still struggles with basic governance. Banks and payment service providers will need to up their game to track these transactions, but without clearer regulations, merchants will keep finding ways around the system.
- KAKenji A. · longtime fan
The proposed MDR hike will only lead to creative workarounds, not necessarily reducing the gap in collections. One critical aspect the article misses is the lack of transparency from payment aggregators on their own fees. If they're taking a 2-3% commission per transaction, how can we expect merchants to comply with 0.4% MDR? It's time for RBI to step in and enforce stricter disclosure requirements from aggregators – not just the merchants playing the game of 'Rs 2,000 trick'.