For a large retailer, the Unified Payments Interface is one of several digital payment options available to customers, alongside debit and credit cards. For a street vendor, neighbourhood shop or small trader, UPI may be the only digital payment option available. It therefore plays a very different role in such businesses. Any change in the cost of accepting UPI can directly influence how these merchants accept payments.

This distinction matters as India revisits the economics of digital payments. Under the announced framework, eligible Person-to-Merchant UPI transactions above ₹2,000 would attract a merchant discount rate (MDR) of 0.4%, subject to applicable caps and sector-specific provisions, while eligible merchants under the specialised Person-to-Person-Merchant category would retain zero-MDR treatment within the prescribed ₹100,000 monthly collection limit. The proposed changes bring the rules for classifying small merchants into sharper focus. The question is not merely how to finance payment infrastructure, but how to ensure that the policy framework continues to accommodate the varied circumstances of the merchants who depend on it.

Why P2PM was created

The National Payments Corporation of India introduced the P2PM category in 2019 to accommodate unorganised and small merchants receiving payments directly into their bank accounts. The initial monthly inward transaction limit was ₹50,000, subsequently raised to ₹100,000. The objective was to encourage small merchants to adopt digital payments and facilitate a shift away from cash.

The category recognised a practical difficulty. Many small vendors operate without the formal merchant-acquiring arrangements typically associated with organised retail. Enabling them to receive UPI payments directly into their own accounts offered a way to participate in digital payments without requiring the same arrangements as larger businesses.

The NPCI’s September 2026 FAQ on Merchant Discount Rate (MDR) retains this distinction. It describes P2PM as a specialised account category intended to support small vendors receiving payments directly into their personal bank accounts. Eligible merchants collecting up to ₹100,000 a month through UPI QR retain zero-MDR treatment. The FAQ also clarifies that GST registration is not a prerequisite for eligibility.

These provisions indicate that P2PM is not simply a transaction-value category. It is a policy mechanism intended to accommodate a particular segment of merchants. The question is whether its eligibility threshold and classification rules continue to serve that purpose effectively.

What does the ₹100,000 threshold measure?

The current framework uses monthly inward UPI collections to determine whether a merchant remains within the P2PM category. Yet the value of payments received through one digital channel does not necessarily establish the overall scale of a business.

A merchant's UPI receipts are not the same as total business turnover, and neither figure establishes profitability or the capacity to absorb additional payment costs. Businesses differ in the proportion of sales collected through UPI, the value and frequency of individual purchases, their operating expenses and their margins.

Consequently, a small merchant whose UPI collections exceed ₹100,000 may not necessarily have the financial capacity or business infrastructure of an established commercial merchant. Equally, low UPI receipts do not, by themselves, establish that a business is informal or financially vulnerable.

This is not an argument that monthly collections should cease to be a criterion. A monetary threshold offers an administratively straightforward means of identifying eligible merchants. The concern is whether a threshold set in an earlier phase of UPI adoption, without periodic reassessment, can continue to distinguish the intended beneficiary group as payment habits and merchant activity evolve.

The ₹100,000 ceiling therefore merits revision. A threshold introduced to encourage adoption should not become an unintended constraint on merchants whose use of digital payments has grown but whose underlying businesses may remain small.

The penalty for success

The Government's FAQ states that acquiring banks and payment service providers monitor the threshold through transaction-velocity checks. Merchants whose inward UPI credits exceed ₹100,000 a month for three consecutive months are transitioned from P2PM to the regular P2M category, where MDR may apply.

The three-month rule offers some protection against a single unusually high month. But three months can also coincide with a festival or wedding season. A sweet shop around Diwali, a garment seller during the wedding season or a vendor near a pilgrimage centre may see collections rise temporarily without a corresponding change in the underlying scale of the business. The rule does not necessarily distinguish a busy season from sustained business growth.

The larger risk concerns merchant behaviour. A merchant who learns that higher UPI collections could mean losing zero-MDR eligibility has a reason to reconsider how readily to accept digital payments. Some may steer customers towards cash or limit their use of UPI. Whether this is happening is an empirical question that policymakers should investigate, not an outcome to assume.

The framework should not leave merchants guessing whether adopting digital payments will cost them. Payment policy should reward adoption, not penalise it.

What should change

Three reforms merit consideration.

First, raise the monthly P2PM threshold to at least ₹300,000. The existing ₹100,000 ceiling should be revised to reflect the growth in digital-payment activity and the diversity of small merchants. A ₹300,000 threshold would provide greater headroom before reclassification, while retaining a defined eligibility boundary. This is a proposed policy threshold, not a claim that ₹300,000 is the empirically optimal figure for every merchant. The revised ceiling should be reviewed periodically, taking account of inflation, merchant-level transaction data, the distribution of UPI collections and the characteristics of merchants being reclassified. A formal review after 12 months would help establish whether further adjustment is warranted.

Second, replace the three-consecutive-month trigger with a six-month rolling average. A rolling average could reduce the influence of temporary spikes in collections and provide a more representative picture of a merchant's UPI activity over time. It would also allow policymakers to distinguish sustained increases from short-term fluctuations more systematically. This should be assessed before implementation, including its implications for monitoring and the timing of reclassification. The objective is not to delay legitimate changes in merchant categorisation indefinitely, but to avoid decisions based on an unduly narrow observation period.

Third, establish transparent transition and appeal procedures. Merchants approaching the threshold should receive advance notice explaining the basis of the calculation and the consequences of reclassification. A defined transition period and a straightforward mechanism to challenge errors should form part of the framework. Acquiring banks and payment service providers should communicate the rules consistently, so that merchants are not left to discover their changed status only after it takes effect. These safeguards would improve predictability without requiring small businesses to navigate elaborate documentation or compliance procedures.

The reforms should be accompanied by systematic monitoring of outcomes. Relevant indicators would include the number and characteristics of merchants transitioning out of P2PM, changes in their digital-payment acceptance and whether reclassification affects their willingness to continue accepting UPI. This evidence would help policymakers assess whether the revised threshold is reaching the intended beneficiaries and whether further changes are needed.

The test of a good rule

Zero-MDR treatment need not extend to every business with a QR code. The challenge is to distinguish small merchants who need support from established commercial operations, without making digital adoption itself a disadvantage.

P2PM was designed to accommodate small vendors. If a threshold fails to account for the diversity of their businesses, it risks losing sight of that purpose. Raising the ceiling to at least ₹300,000, smoothing the reclassification trigger and establishing a transparent transition process would be practical steps towards a fairer framework.

The measure of a good rule is not simply whether it draws a clear line, but whether that line distinguishes fairly between those it is intended to serve. As UPI grows, its rules for small merchants must evolve with it.

(This is Part 2 of a two-part series on UPI’s MDR debate. Part 1 examined how the new fee framework could affect merchant acceptance; this part looks at whether the P2PM threshold still protects small merchants effectively.)