A Merchant Discount Rate (MDR) of 0.4% will be applied to Person-to-Merchant (P2M) UPI transactions above ₹2,000 from 15 October 2026. For transactions of ₹75,000 and above, the MDR is capped at ₹300 per transaction.
This means that when a customer makes a UPI payment of more than ₹2,000 to a merchant, the MDR will be deducted from the merchant-side transaction. GST will also be applicable on the MDR charged.
The new framework has raised questions over whether the MDR, along with GST on the fee, will increase the cost of accepting digital payments for small merchants.
The National Payments Corporation of India (NPCI), however, has said such concerns are misplaced.
In a post on X, NPCI clarified that most UPI merchant transactions will continue to remain outside the MDR framework and explained why GST on MDR should not result in an additional tax burden for eligible merchants.
What has NPCI said about GST on MDR?
“Certain media reports have alleged that GST on UPI Merchant Discount Rate (MDR) will burden small merchants and make digital payments costly. This is incorrect,” NPCI noted.
It explained that MDR applies only to P2M transactions above ₹2,000, while transactions up to ₹2,000 will continue to have zero MDR and, therefore, no GST impact arising from MDR.
“Government data indicates that transactions of up to ₹2,000 constitute more than 96% of UPI merchant transaction volume. As a result, the overwhelming majority of UPI payments will not attract MDR and hence no GST on MDR,” NPCI added.
Why does NPCI say GST on MDR will not become an additional cost?
GST is applicable on the MDR amount where MDR is charged. NPCI said the GST paid by a merchant on MDR can be adjusted against the GST payable on the merchant’s sale of goods or services.
“GST paid on MDR by a merchant will be adjusted against the GST payable on the sale of goods, in the same manner that input taxes are set off against output tax liability. Consequently, merchants do not bear the cost of GST on the MDR amount paid by them,” NPCI noted.
For example, suppose a merchant receives a UPI payment of ₹10,000. At an MDR of 0.4%, the MDR would be ₹40. If GST at 18% is charged on this ₹40 MDR, the GST would be ₹7.20.
If the merchant is eligible to claim input tax credit, this ₹7.20 can be claimed as input tax credit on the MDR service. It can then be set off against the GST that the merchant has to pay on its sales.
If the merchant has ₹500 of GST payable on its sales, the ₹7.20 GST paid on MDR can be adjusted against it. The merchant would then have ₹492.80 of net GST liability, subject to the applicable input-tax-credit rules.
Therefore, the GST on MDR may not become an additional tax cost for a merchant who is eligible to claim and use the input tax credit.
Will small merchants have to pay MDR?
NPCI also highlighted a separate zero-MDR provision for small merchants. “Merchants with monthly UPI receipts of up to ₹1 lakh are not liable to pay MDR and therefore do not even have the issue of GST on MDR.”
Small merchants operating under the Person-to-Person Merchant (P2PM) framework will continue with zero MDR. These are small vendors receiving up to ₹1 lakh per month through UPI QR directly into their personal bank accounts.
NPCI concluded that “apprehensions that GST on MDR will impose an additional burden on merchants are misplaced”, adding that “the overwhelming majority of UPI transactions and small merchants remain unaffected.”
