Key Takeaways
- Merchants will pay the new 0.4% UPI MDR.
- Customers cannot be charged the MDR separately.
- About 96% of merchant UPI payments will remain unaffected.
Customers will not pay the new UPI Merchant Discount Rate (MDR) from October 15, while eligible merchants will bear the charge on higher-value payments.
UPI MDR will apply to some merchant payments
A new 0.4% UPI MDR will apply to specified person-to-merchant (P2M) UPI transactions above Rs 2,000 from October 15. The fee will be paid within the payment system by merchants and will not become a separate charge for customers.
The MDR will have a maximum limit of Rs 300 for transactions of Rs 75,000 and above. Person-to-person UPI payments will remain free, regardless of the amount transferred.
Payments to merchants up to Rs 2,000 will also remain outside the MDR framework. The government has said banks and payment platforms will ensure merchants do not add the MDR to customers’ bills. Compliance checks will begin when the new framework takes effect.
Most UPI merchant payments will remain free
The new charge will affect only a small share of UPI merchant transactions. Government data estimates that around 96% of P2M transactions will remain outside the MDR framework.
This includes payments below the Rs 2,000 threshold and transactions covered by the zero-MDR rules for small merchants. Small merchants receiving up to Rs 1 lakh a month through eligible UPI QR transactions will also continue to receive payments without MDR.
Certain essential sectors will follow a separate fee structure. UPI payments above Rs 2,000 for areas such as railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat Rs 5 MDR. Capital market transactions will face a lower MDR of 0.02%, subject to the applicable cap.
The framework also keeps RuPay debit card payments free regardless of transaction value. This gives merchants another digital payment option for transactions that could otherwise attract MDR.
GST will apply to MDR, not the full transaction
The new MDR will attract 18% GST, but the tax will apply only to the MDR amount and not to the full value of the UPI transaction.
For example, a Rs 10,000 eligible UPI payment would attract an MDR of Rs 40. The 18% GST on that fee would add Rs 7.20, taking the total MDR-related cost to Rs 47.20 for the merchant.
GST-registered businesses that qualify under the rules can claim input tax credit for the GST paid on MDR. This allows them to offset the tax against their eligible output GST liability. Businesses with exempt supplies may face different tax treatment because input tax credit depends on the applicable GST rules.
The government has also said MDR is not a government tax or a fee collected by NPCI. The charge will be distributed among participants in the payment ecosystem, including banks and payment service providers.
The new UPI MDR framework is designed to create a revenue stream for the payment ecosystem while keeping most UPI transactions free for customers.
The new framework aims to create a revenue stream for the UPI payment ecosystem while keeping person-to-person transfers and most merchant payments free. A dedicated fund will also receive an amount equal to 5% of MDR collections to support UPI adoption among small merchants.
