A new Merchant Discount Rate (MDR) will apply to certain UPI merchant payments from October 15, 2026. Under the new framework, a 0.4% MDR will be charged on eligible Person-to-Merchant (P2M) UPI transactions above ₹2,000.
An 18% GST will also apply to the MDR amount. The GST will not be calculated on the entire UPI payment. Instead, it will apply only to the MDR charged on the eligible transaction.
How Will the New UPI MDR Work?
The 0.4% MDR will apply when a qualifying P2M UPI payment exceeds ₹2,000. The charge is a merchant-side fee and is not a tax imposed on the complete payment amount.
For example, if a qualifying merchant receives a UPI payment of ₹10,000, the 0.4% MDR would be ₹40. An 18% GST on that ₹40 MDR would amount to ₹7.20. Therefore, the GST is calculated on the fee rather than on the ₹10,000 payment itself.
The new MDR framework will not affect person-to-person UPI transfers. Payments to merchants of ₹2,000 or less will also remain outside the MDR framework.
Why Is There Concern Over GST on MDR?
The introduction of GST on MDR has raised concerns among some businesses, particularly merchants who are not registered under GST and therefore may not be eligible to claim Input Tax Credit (ITC).
The issue has led to discussions about how the GST component could affect smaller businesses. However, the National Payments Corporation of India (NPCI) has said that concerns about an additional burden from GST on MDR are misplaced and has explained that eligible registered merchants can claim ITC on the GST paid on the MDR.
Will the October 15 UPI Rule Change?
The 0.4% MDR framework is scheduled to take effect from October 15, 2026. The GST component applies to the MDR charged on eligible transactions.
The new system is therefore focused on selected merchant transactions rather than all UPI payments. The government has also clarified that around 96% of P2M transactions will remain unaffected because they are either below the ₹2,000 threshold or covered under the zero-MDR framework for small merchants.
Who Will Remain Exempt?
According to the framework, merchants with monthly UPI collections of up to ₹1 lakh will remain exempt from MDR. This means the new charge is primarily aimed at qualifying higher-value merchant transactions rather than routine small payments.
For customers, the MDR is a merchant-side charge. Banks have been advised to ensure that merchants do not pass the MDR on to customers.
Disclaimer: This article is intended for informational purposes only. UPI charges, tax treatment, exemptions and applicable rules may be subject to official updates. Users and merchants should check the latest information issued by NPCI, the government and their respective banks before relying on the details.