Key Takeaways on UPI MDR from October 15, 2026
- From October 15, 2026, a 0.4% Merchant Discount Rate (MDR) applies to specified person-to-merchant (P2M) UPI payments above Rs 2,000, capped at Rs 300 per transaction.
- Customers do not pay. Person-to-person (P2P) transfers stay free at any amount, and merchants are not allowed to pass MDR on to customers.
- MDR is not a tax. It is a fee shared among banks and payment apps. But the fee is a taxable service, so 18% GST applies on the MDR amount only, never on the payment itself.
- GST-registered merchants can claim input tax credit on that GST, if their GSTIN is with the bank or payment aggregator so the charge reaches GSTR-2B. Composition dealers and merchants with only exempt supplies cannot.
- Small merchants receiving up to Rs 1 lakh a month through UPI QR codes under the P2PM category stay at zero MDR. Railways, telecom, insurance, fuel and agricultural inputs pay a flat Rs 5 per transaction above Rs 2,000.
UPI has been free for merchants since January 2020. That changes on October 15, 2026. Under the framework announced by the Ministry of Finance on September 15, 2026, specified merchant payments above Rs 2,000 will carry a Merchant Discount Rate.
The headlines said "UPI charges", and a lot of users assumed they would start paying. They will not. The charge sits with merchants, most merchant transactions stay free, and for GST-registered businesses the GST on the fee can be recovered as input tax credit, if the paperwork is set up before the first settlement.
This guide covers what changes, who pays, how GST and ITC work on MDR, the income tax treatment, and what merchants should do before October 15.
Looking for expert help with UPI charges 2026, UPI MDR 2026, UPI GST, UPI charges for merchants, UPI MDR GST, 0.4% UPI charges? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant. End-to-end filings, notices, and deadline tracking, all in one place.
What Is MDR?
The Merchant Discount Rate is the fee a merchant pays to its bank or payment service provider for accepting and settling a digital payment. Card payments have always carried MDR. UPI and RuPay debit cards have been zero-MDR since January 1, 2020.
The Ministry of Finance's September 15, 2026 release is clear that MDR is "neither a tax nor a charge collected by the Government or NPCI". It is shared among payment ecosystem participants such as banks and payment apps, to fund running and expanding UPI.
That distinction matters for GST. The government does not collect MDR, but MDR is the price of a financial service, and financial services supplied by banks are taxable at 18%.
Who Pays MDR and Who Does Not
What Stays Free
| Transaction | MDR |
|---|---|
| All P2P transfers (sending money to friends and family) | Nil, at any amount |
| P2M payments up to Rs 2,000 | Nil |
| Small merchants under P2PM, receiving up to Rs 1 lakh a month via UPI QR | Nil |
The government estimates that about 96% of merchant transactions will not attract MDR, because most UPI merchant payments are Rs 2,000 or less.
What Attracts MDR
| Transaction | MDR |
|---|---|
| Specified P2M payments above Rs 2,000 | 0.4%, capped at Rs 300 |
| Railways, telecom, insurance, fuel, agricultural inputs (above Rs 2,000) | Flat Rs 5 per transaction |
| Capital market transactions (mutual funds, securities) | 0.02%, capped at Rs 300 |
Customers cannot be charged. The release says merchants are not to pass MDR on to customers, and banks are to make sure they do not. A surcharge at the counter for paying by UPI is exactly what the framework rules out.
The MDR Structure at a Glance
| Transaction Type | MDR | Cap | GST on MDR |
|---|---|---|---|
| P2M above Rs 2,000 (standard) | 0.4% | Rs 300 | 18% |
| P2M above Rs 2,000 (railways, telecom, insurance, fuel, agri inputs) | Flat Rs 5 | Not applicable | 18% |
| Capital market transactions | 0.02% | Rs 300 | 18% |
| P2M up to Rs 2,000 | Nil | Not applicable | Nil |
| P2P (any amount) | Nil | Not applicable | Nil |
| P2PM small merchants (up to Rs 1 lakh a month) | Nil | Not applicable | Nil |
How the Rs 300 cap works: 0.4% of Rs 75,000 is exactly Rs 300. On any payment of Rs 75,000 or more, MDR stays at Rs 300.
GST on MDR: 18% on the Fee, Not on the Payment
A customer paying Rs 10,000 by UPI does not create GST on Rs 10,000. GST applies only to the MDR the bank charges the merchant, because that fee is the bank's taxable supply. The underlying sale is taxed (or not) exactly as it was before.
So for a Rs 10,000 payment:
- MDR at 0.4% = Rs 40
- GST at 18% on Rs 40 = Rs 7.20
- The merchant's total cost = Rs 47.20
The "GST on UPI above Rs 2,000" messages that went viral earlier were false. The only GST involved is on the bank's fee. Our GST on UPI payments explainer covers the older myths.
Can Merchants Claim ITC on GST Paid on MDR?
MDR is a service used in the course of business, so the GST on it is eligible input tax credit under Section 16 of the CGST Act for a registered merchant making taxable supplies. Whether you actually get the credit depends on three practical things.
| Merchant Type | ITC on GST on MDR |
|---|---|
| Regular GST-registered merchant making taxable supplies | Yes |
| Merchant making both taxable and exempt supplies | Partly: the share for exempt supplies is reversed under Rule 42 |
| Merchant making only exempt supplies | No; GST is a cost |
| Composition scheme dealer | No; composition dealers cannot claim ITC |
| Unregistered merchant | No; GST is a cost |
1. Give Your GSTIN to the Bank or Payment Aggregator
This is the step most small merchants miss. Your acquiring bank or payment aggregator reports its MDR invoices in its own GSTR-1. If it does not have your GSTIN, the charge is reported as a B2C supply, it never appears in your GSTR-2B, and under Section 16(2)(aa) you cannot claim credit that is not in GSTR-2B.
Action: Before October 15, confirm that your GSTIN is registered against each merchant account and QR code with every bank or aggregator you use. If you have more than one GSTIN, map each outlet to the right one.
2. Get a Tax Invoice or a Consolidated Statement
You need a tax invoice to claim ITC. Under Rule 54(2) of the CGST Rules, a bank can issue a consolidated tax invoice or a statement for its services during a month, instead of an invoice for every transaction. Ask your bank or aggregator for a monthly GST invoice or statement that shows MDR and GST separately.
3. Match It in GSTR-2B Every Month
Check that the MDR invoices appear in GSTR-2B before you claim the credit in GSTR-3B. See our guide to ITC eligibility and GSTR-2B reconciliation.
Worked Examples
Example 1: Rs 1,800 Payment at a Shop
| Particulars | Amount |
|---|---|
| Payment | Rs 1,800 |
| MDR | Nil (Rs 2,000 or less) |
Example 2: Rs 10,000 Payment, Registered Merchant
| Particulars | Amount |
|---|---|
| Payment | Rs 10,000 |
| MDR at 0.4% | Rs 40.00 |
| GST at 18% on MDR | Rs 7.20 |
| Charged to merchant | Rs 47.20 |
| ITC claimed in GSTR-3B | Rs 7.20 |
| Net cost | Rs 40.00 |
Example 3: Rs 1,00,000 Payment, MDR Capped
| Particulars | Amount |
|---|---|
| Payment | Rs 1,00,000 |
| MDR at 0.4% would be Rs 400, capped at | Rs 300.00 |
| GST at 18% on MDR | Rs 54.00 |
| Charged to merchant | Rs 354.00 |
| ITC claimed (registered merchant) | Rs 54.00 |
| Net cost | Rs 300.00 |
Example 4: Rs 10,000 Payment, Composition Dealer
| Particulars | Amount |
|---|---|
| MDR at 0.4% | Rs 40.00 |
| GST at 18% on MDR | Rs 7.20 |
| ITC | Nil (not allowed under composition) |
| Net cost | Rs 47.20 |
Example 5: Rs 3,000 Fuel Payment
| Particulars | Amount |
|---|---|
| Flat MDR | Rs 5.00 |
| GST at 18% on MDR | Rs 0.90 |
| Charged to merchant | Rs 5.90 |
Income Tax Treatment of MDR
- Deductible expense: MDR is a business expense (bank or payment processing charges). Where GST on MDR cannot be claimed as ITC, that GST is part of the expense too. Where ITC is claimed, only the MDR is expensed.
- No TDS by the merchant: The bank keeps MDR out of the settlement; the merchant does not pay it as commission to an agent. The Delhi High Court held in CIT v. JDS Apparels (2014) that amounts retained by banks on card payments are not commission under Section 194H.
- Books: Record receipts gross, with MDR as an expense and GST on MDR in the ITC ledger. Recording only the net settlement understates turnover and breaks reconciliation with GSTR-1 and your bank statement.
Small Merchants: The P2PM Exemption
Merchants in the P2PM (person-to-person-merchant) category, typically small shops and vendors collecting through a basic UPI QR code into a savings or current account, stay at zero MDR while receipts are up to Rs 1 lakh a month. GST registration is not a condition.
If your UPI receipts regularly cross Rs 1 lakh a month, ask your bank how your QR will be categorised from October 15 and whether MDR will start applying to payments above Rs 2,000.
Why the Framework Was Introduced
Zero MDR helped UPI reach mass adoption, but it left banks and payment apps without a revenue model for running the network. The share of high-value merchant payments has also grown. The framework charges only that high-value slice while keeping P2P, small-value payments and small merchants free.
Two further features:
- Flat Rs 5 for essential, thin-margin sectors (railways, telecom, insurance, fuel, agricultural inputs), so a large fuel or insurance payment does not attract a percentage fee.
- 5% of total MDR collections goes to a dedicated fund to expand UPI adoption among small merchants.
What Merchants Should Do Before October 15
| Step | Action |
|---|---|
| 1 | Ask your bank or aggregator which category your QR or merchant ID falls in: P2PM (zero MDR), standard (0.4%), or flat Rs 5 sector |
| 2 | Register your GSTIN against every merchant account and QR code, so MDR invoices reach GSTR-2B |
| 3 | Ask for a monthly GST invoice or consolidated statement showing MDR and GST separately |
| 4 | Set up a ledger for UPI MDR and a monthly check against GSTR-2B |
| 5 | If you are a composition dealer or sell only exempt goods, budget the GST on MDR as a cost |
| 6 | Do not add a UPI surcharge for customers; the framework does not allow it |
| 7 | For heavy high-value UPI volume, compare the capped Rs 300 MDR with card and net banking costs |
Key Takeaways
| Point | Detail |
|---|---|
| Effective Date | October 15, 2026 |
| MDR Rate | 0.4% on specified P2M payments above Rs 2,000 |
| Cap | Rs 300 (reached at Rs 75,000) |
| Customers | Pay nothing; merchants cannot pass MDR on |
| P2P | Free at any amount |
| Small Merchants (P2PM) | Zero MDR up to Rs 1 lakh a month |
| Essential Sectors | Flat Rs 5 per transaction above Rs 2,000 |
| Capital Markets | 0.02%, capped at Rs 300 |
| GST | 18% on the MDR only |
| ITC | Available to regular registered merchants; needs GSTIN with the bank and the charge in GSTR-2B |
| No ITC | Composition dealers, exempt-only and unregistered merchants |
| Income Tax | MDR is a deductible expense; no TDS under 194H |
Where Tax Garden Helps
UPI MDR adds a new GST line to every merchant's books from October 15: a monthly bank invoice, a credit to match in GSTR-2B, and a cost to track. Small errors, like a GSTIN missing from a merchant account, quietly turn recoverable GST into a permanent cost.
Tax Garden's team helps you:
- Check which MDR category each of your UPI accounts falls in
- Get your GSTIN mapped to every merchant account and QR code
- Reconcile MDR charges and GST against bank settlements and GSTR-2B
- Claim ITC correctly in GSTR-3B, with Rule 42 reversals where needed
- Record MDR correctly for income tax
- File GSTR-1, GSTR-3B and GSTR-9 with MDR-related credits in order
Looking for expert help with UPI charges 2026, UPI MDR 2026, UPI GST, UPI charges for merchants, UPI MDR GST, 0.4% UPI charges? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant. End-to-end filings, notices, and deadline tracking, all in one place.
UPI Charges and MDR from October 2026: Frequently Asked Questions
Will customers be charged for UPI payments from October 15, 2026?
No. Person-to-person UPI transfers stay free at any amount, and customers do not pay MDR on merchant payments either. The Ministry of Finance has said merchants are not to pass MDR on to customers.
What is the MDR on UPI payments above Rs 2,000?
From October 15, 2026, specified person-to-merchant UPI payments above Rs 2,000 carry an MDR of 0.4%, capped at Rs 300 per transaction. Railways, telecom, insurance, fuel and agricultural inputs pay a flat Rs 5, and capital market transactions pay 0.02%, capped at Rs 300.
Is UPI MDR a government tax?
No. The Ministry of Finance's September 15, 2026 release says MDR is neither a tax nor a charge collected by the Government or NPCI. It is shared among banks and payment application providers.
Is GST charged on UPI payments above Rs 2,000?
Not on the payment. GST at 18% applies only to the MDR the bank charges the merchant. On a Rs 10,000 payment, MDR is Rs 40 and GST on it is Rs 7.20.
Can merchants claim input tax credit on GST paid on UPI MDR?
Yes, if the merchant is a regular GST-registered business making taxable supplies. The bank or aggregator must have the merchant's GSTIN so the charge appears in GSTR-2B, and the bank's monthly tax invoice or consolidated statement under Rule 54(2) supports the claim. Composition dealers, exempt-only businesses and unregistered merchants cannot claim it.
Why is the GST on MDR not showing in my GSTR-2B?
Usually because the bank or payment aggregator does not have your GSTIN against that merchant account, so it reported the charge as a B2C supply. Share your GSTIN with the bank for every merchant account and QR code. Credit not in GSTR-2B cannot be claimed under Section 16(2)(aa).
Which merchants are exempt from UPI MDR?
Small merchants in the P2PM category receiving up to Rs 1 lakh a month through UPI QR codes stay at zero MDR, whether or not they are GST registered. All P2P transfers and all merchant payments of Rs 2,000 or less also carry no MDR.
Can a shop add a surcharge for UPI payments above Rs 2,000?
No. The framework does not allow merchants to pass MDR on to customers, and banks are expected to enforce this.
Do merchants deduct TDS on UPI MDR?
No. MDR is retained by the bank from the settlement and is not commission paid to an agent. The Delhi High Court held in CIT v. JDS Apparels (2014) that amounts retained by banks on card transactions are not covered by Section 194H.
Is UPI MDR deductible for income tax?
Yes. MDR is a business expense. If you cannot claim ITC on the GST on MDR, that GST is also part of the expense.
Sources: Ministry of Finance press release dated September 15, 2026 (PIB) on the UPI MDR framework; Sections 16 and 16(2)(aa) of the CGST Act, 2017; Rules 42 and 54(2) of the CGST Rules, 2017; Delhi High Court in CIT v. JDS Apparels Pvt Ltd (2014). Categories and effective dates depend on your bank's implementation, so confirm with your acquiring bank or payment aggregator. This article is general information, not professional advice.
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