UPI MDR Charges: Rates, GST, Rules, and Charges on UPI Transactions

UPI MDR charges refer to the Merchant Discount Rate applied to eligible merchant payments made through UPI. MDR is a payment ecosystem charge, not a government tax.

MDR stands for Merchant Discount Rate. It is associated with the processing of eligible merchant payments.

UPI payments can broadly be divided into two categories:

• P2P: One individual makes a payment to another individual.
• P2M: An individual makes a payment to a merchant.

The distinction matters because MDR applies to specified P2M transactions under the new framework.

As per the Ministry of Finance clarification, P2P UPI transactions will remain free. Eligible merchant payments up to ₹2,000 will also remain free.

MDR is handled within the payment ecosystem. It is not a tax collected by the government or NPCI.

For merchants, understanding MDR is important because the applicable charge can affect the amount received during payment settlement.

The specific rates and transaction categories are explained in the next section.

The new UPI MDR framework will take effect from 15 October 2026. It applies to specified merchant transactions.

As per the Ministry of Finance, specified P2M transactions above ₹2,000 will attract a standard MDR of 0.4%.

Transactions of ₹75,000 or more will have an MDR cap of ₹300 per transaction.

The framework also provides separate MDR rates for certain sectors and transaction categories.

The government has also stated that around 96% of P2M transactions are expected to remain unaffected under the new framework. This is because the standard MDR applies only to specified transactions.

The applicable rate can therefore depend on the transaction amount, merchant category, and transaction type.

UPI MDR charges do not apply to every UPI payment. The applicable treatment depends on the transaction type, value, and merchant category.

Under the new framework, MDR applies only to specified person-to-merchant (P2M) transactions above ₹2,000. Person-to-person (P2P) transactions remain free, regardless of the amount transferred. This is confirmed by the Ministry of Finance.

The following UPI transactions remain free of MDR:

Small Merchants With Zero MDR

Small merchants receiving up to ₹1 lakh per month through UPI QR codes under the Person-to-Person-Merchant (P2PM) category will continue to receive zero MDR on all eligible transactions.

The Ministry of Finance states that this provision covers small merchants, including street vendors and neighbourhood shops. It helps keep UPI payment costs lower for these businesses.

When Does MDR Apply?

For specified P2M transactions above ₹2,000, the standard MDR is 0.4%.

However, not every transaction above ₹2,000 uses the standard rate. Certain sectors and transaction categories have separate MDR treatment.

For example, transactions above ₹2,000 in specified essential sectors attract a flat ₹5 MDR. Capital-market transactions have a separate 0.02% MDR, subject to the applicable cap.

Therefore, businesses should check the transaction category and applicable MDR rate before calculating their UPI payment cost.

The Ministry of Finance also clarifies that MDR is not a tax collected by the Government or NPCI. It is distributed among participants in the payment ecosystem.

UPI MDR charges are calculated by applying the applicable MDR rate to the transaction amount.

For the standard category, the MDR rate is 0.4% on specified P2M transactions above ₹2,000.

MDR = Transaction amount × Applicable MDR rate

For example, if a business receives a ₹5,000 eligible UPI payment:

₹5,000 × 0.4% = ₹20 MDR

The applicable rate can differ for certain sectors and transaction categories. So, businesses should confirm the applicable rate before calculating the charge.

UPI MDR Calculation Examples:

The ₹1 lakh example shows why the cap matters. A 0.4% calculation gives an MDR of ₹400, but the applicable cap limits it to ₹300.

For transactions of ₹75,000 or more, the standard MDR is capped at ₹300, subject to the applicable transaction category and rules.

The calculation also changes when a transaction falls under a sector with a separate MDR rate. For example, specified essential-sector transactions use a different rate from the standard 0.4% category.

You can check the applicable UPI MDR category and rates in the Ministry of Finance clarification.

GST and UPI MDR are two separate charges. GST is not calculated on the entire UPI payment amount.

As clarified by the Ministry of Finance, GST is applicable to charges such as MDR when such charges are levied. The government has also clarified that GST is not a tax on UPI transactions themselves.

This distinction is important for businesses. A customer may pay ₹10,000 through UPI, but GST is not calculated on the ₹10,000 simply because the payment was made through UPI.

Instead, where an applicable MDR is charged, the GST treatment relates to the taxable service or charge.

Example: GST on UPI MDR

Suppose an eligible merchant receives a ₹10,000 UPI payment.

The applicable MDR is:

₹10,000 × 0.4% = ₹40

If the applicable service attracts GST at 18%, the GST calculation would be:

₹40 × 18% = ₹7.20

So, the MDR and GST components would be:

The ₹7.20 is not GST on the ₹10,000 UPI payment. It represents GST on the applicable MDR service charge.

Businesses should also check their actual settlement statement and tax documents. The applicable GST treatment can depend on the service provider and transaction arrangement.

This distinction becomes especially important when businesses record UPI settlements in their books. The accounting treatment and possible input tax credit are discussed separately below.

Businesses may be able to claim Input Tax Credit (ITC) on GST paid on applicable UPI MDR charges, subject to the normal conditions under GST law.

The CBIC Input Tax Credit rules provide the framework for claiming ITC on eligible business expenses.

For ITC on GST charged on UPI MDR, businesses should generally ensure that:

• The MDR relates to business activities.
• GST has been correctly charged on the applicable MDR.
• The business has a valid tax invoice or other prescribed document.
• The supplier has reported the relevant invoice details as required.
• The business has received the relevant service.
• Other conditions under Section 16 of the CGST Act are satisfied.

The exact ITC eligibility can depend on the nature of the business, the transaction, and the applicable GST provisions.

What About Composition Taxpayers?

Businesses registered under the Composition Scheme cannot claim Input Tax Credit on their purchases or business expenses. The CBIC confirms that taxpayers under the composition scheme are not eligible for input tax credit.

Therefore, GST paid on applicable UPI MDR charges cannot be claimed as ITC by a composition taxpayer.

Regular taxpayers should record eligible GST separately from the MDR expense and reconcile it with their GST records before claiming ITC.

UPI MDR is a charge within the merchant payment ecosystem. It is not a transaction fee that customers pay when making UPI payments.

Under the current framework, banks have been advised to ensure that merchants do not pass MDR charges on to customers. The Ministry of Finance clarification on UPI MDR also states that UPI application providers cannot impose platform fees or hidden charges on individuals for these payments.

How Does the MDR Flow?

The payment flow can be understood simply:

Customer pays through UPI → Merchant receives the payment → Applicable MDR is settled within the payment ecosystem → Merchant receives the net settlement

MDR is shared among payment ecosystem participants, including banks, payment service providers, and UPI application providers.

For example, if an eligible merchant transaction attracts MDR, the merchant's settlement amount may be lower than the customer's payment amount. The customer still pays the invoice or purchase amount shown by the merchant.

Can a Merchant Recover MDR From the Customer?

MDR should not be added separately to the customer's UPI payment.

For example, a merchant should not add a separate “UPI MDR charge” to a customer's bill simply because the payment was made through UPI.

The Ministry of Finance has specifically clarified that customers will not pay MDR. This keeps the MDR within the merchant-side payment ecosystem rather than making it a direct charge on UPI users.

Businesses should therefore record applicable MDR as a payment-related cost during settlement and accounting reconciliation. The invoice amount and the payment processing cost should be treated separately.

The standard 0.4% UPI MDR does not apply to every eligible merchant transaction. Some categories have separate rates.

As per the Ministry of Finance, the applicable treatment varies by transaction category.

Essential Sectors

The ₹5 MDR provision covers specified transactions in essential sectors.

These include:

• Railways
• Telecommunications
• Insurance
• Fuel
• Agricultural inputs

For example, a qualifying ₹10,000 transaction in a covered sector would attract ₹5 MDR.

Capital-Market Transactions

Specified capital-market transactions have an MDR of 0.02%.

These include specified transactions involving:

• Mutual funds
• Securities
• Stockbrokers
• Dealers

For example, a qualifying ₹50,000 transaction would have:

₹50,000 × 0.02% = ₹10 MDR

The applicable category should be confirmed before calculating the charge.

When an eligible UPI payment attracts MDR, the charge can affect the amount ultimately settled to the merchant's account.

The customer-facing payment amount and the merchant's settlement amount are therefore not always the same.

For example, assume an eligible merchant receives a ₹10,000 UPI payment. The applicable MDR in the standard category is ₹40.

The basic settlement calculation would be:

₹10,000 − ₹40 = ₹9,960

So, the merchant would receive ₹9,960 before considering applicable GST or other settlement adjustments.

Example of a Merchant Settlement

The actual settlement statement can contain separate entries for MDR, GST, refunds, adjustments, or other applicable charges.

This is why businesses should not treat the bank credit amount as the original sales value.

The sale should be recorded according to the underlying transaction. Payment-processing charges should be recorded separately based on the applicable accounting treatment.

Businesses should also reconcile their sales records, UPI settlement reports, and bank statements regularly.

This helps identify differences between the amount billed, amount received, and payment-related charges deducted.

UPI MDR should be recorded separately from the underlying sale. The sale amount represents the business transaction, while MDR represents a payment-processing cost.

For example, assume a business makes a ₹10,000 sale through an eligible UPI transaction.

If the applicable MDR is ₹40, the accounting records should distinguish the sale from the payment charge.

Simple Accounting Example

A simple accounting treatment can record the transaction as:

Bank / UPI Settlement A/c Dr. ₹9,960

UPI MDR Expense A/c Dr. ₹40

To Sales A/c ₹10,000

This keeps the sales value and payment-processing expense separate.

If GST is charged on the MDR, the GST component should also be recorded separately. Where the business is eligible for ITC, the eligible input tax can be accounted for according to the applicable GST rules.

For example, where ₹7.20 GST is charged on ₹40 MDR:

Bank / UPI Settlement A/c Dr. ₹9,952.80

UPI MDR Expense A/c Dr. ₹40

Input GST A/c Dr. ₹7.20

To Sales A/c ₹10,000

The exact ledger accounts can differ based on the business's accounting system and settlement structure.

Businesses should match these entries with the UPI settlement report, tax document, and bank statement. This helps keep payment charges and GST records accurate.

For GST reporting, the business should also ensure that any ITC claim satisfies the applicable conditions under GST law.

Businesses should reconcile their UPI settlements with their sales records, payment reports, and GST records.

Before recording UPI MDR charges, check the following:

• Transaction amount: Match the customer payment with the sales invoice.
• Transaction category: Confirm whether the payment falls under a category where MDR applies.
• Applicable rate: Check the MDR rate used by the payment provider.
• MDR amount: Verify the amount deducted from the merchant settlement.
• GST on MDR: Check whether GST has been charged separately on the applicable MDR.
• Tax document: Keep the relevant invoice or prescribed document for accounting and ITC purposes.
• Settlement amount: Match the net amount received in the bank account with the payment provider's settlement report.
• Refunds and reversals: Check whether refunds, failed transactions, or reversals have changed the settlement amount.
• Accounting entry: Record the sale, MDR expense, and eligible GST separately.
• ITC records: Reconcile eligible input tax credit with the relevant GST records before claiming it.

A regular reconciliation process can help businesses identify differences between their sales amount, UPI settlement, MDR deductions, and GST records.

Payment providers may show MDR and GST as separate entries in settlement reports. Businesses should use these reports along with their accounting records for reconciliation.

UPI MDR charges apply differently depending on the transaction type, amount, merchant category, and applicable sector rules. Not every UPI payment attracts MDR, and several transaction categories remain exempt.

For businesses, the key is to understand the applicable rate and how it affects settlement amounts. GST on MDR should also be recorded separately where applicable.

Businesses should reconcile their UPI settlements with invoices, MDR deductions, GST records, and bank entries. Reviewing these details regularly can help keep payment records and accounting accurate as the new MDR framework takes effect from October 2026.