MDR on UPI Payments from 15 October 2026: Rates, Exemptions and Tax Impact

1. What is MDR (Merchant Discount Rate)?
   • MDR is the fee a merchant pays to its acquiring bank or payment aggregator for accepting digital payments. It is a percentage of the transaction value or a flat amount per transaction, and it is shared among the banks, payment service providers and the network that process the payment.
   • The customer does not pay MDR. It is deducted from, or billed against, the amount settled to the merchant.
   • For comparison, credit card MDR typically ranges from 1.5% to 2.5%, and debit card MDR is capped at up to 0.90% (as stated in the Ministry of Finance FAQs).
   • Since 1 January 2020, payments through RuPay debit cards and UPI (BHIM-UPI / UPI QR code) carried zero MDR under section 10A of the Payment and Settlement Systems Act, 2007, read with section 269SU of the Income-tax Act, 1961.
2. What Has Changed in the Law:
   • Section 10A amended: The Taxation and Other Laws (Amendment) Act, 2026 amended section 10A of the Payment and Settlement Systems Act, 2007. Instead of covering all modes prescribed under section 269SU, it now protects only the electronic payment modes that the Central Government specifies by notification.
   • Notification dated 14 September 2026: The Ministry of Finance notified that no bank or system provider may impose any charge, directly or indirectly, on a person making or receiving a payment through:
     • RuPay debit cards, with no limit on amount; and
     • UPI transactions up to ₹2,000.
   • Who sets the rates: The MDR rates, category caps and fee distribution are decided by the UPI and Services Steering Committee, headed by NPCI. They are explained in the Ministry of Finance FAQs dated 15 September 2026.
   • Effective date: 15 October 2026.
3. New MDR Rates on UPI Merchant (P2M) Payments:

   Category of merchant / payment	Up to ₹2,000	Above ₹2,000
   General merchant payments (P2M)	Nil	0.4%, capped at ₹300 per transaction for payments of ₹75,000 and above
   Railways, telecom, insurance premium, fuel, public utilities (electricity, water, piped gas) and other notified “industry program” categories	Nil	Flat ₹5 per transaction
   Education fees (schools, universities, entrance examinations)	Nil	Flat fee or capped rate under the industry program category
   Capital market payments (mutual funds, SEBI-registered stockbrokers, securities dealers, investment platforms)	Nil	0.02%, maximum ₹300

   How MDR is calculated (examples from the Ministry of Finance FAQs):

   Amount paid to merchant	Applicable MDR	MDR paid by merchant
   ₹2,000	Nil	₹0
   ₹3,000	0.40%	₹12
   ₹50,000	0.40%	₹200
   ₹1,00,000	Cap applies	₹300 (not ₹400)

   Note that once a payment exceeds ₹2,000, MDR is calculated on the full transaction value, not only on the amount above ₹2,000.
4. Who Is Not Affected:
   • Consumers: No charge for paying through UPI. UPI apps cannot charge any platform fee on UPI payments.
   • Person-to-person (P2P) transfers: Free for any amount, including transfers to family and friends and self-transfers between your own accounts.
   • Small merchants (P2PM category): Vendors receiving up to ₹1 lakh per month through UPI QR directly into their own bank accounts continue with zero MDR, even on individual payments above ₹2,000. GST registration is not needed for this. A P2PM merchant whose UPI receipts exceed ₹1 lakh per month for 3 consecutive months is moved to the regular P2M category.
   • UPI AutoPay / mandates: Recurring payments such as utility bills, OTT subscriptions and mutual fund SIPs carry no prescribed MDR.
   • RuPay debit card payments: Remain free of charges, with no amount limit.
   • Existing QR codes and soundboxes continue to work, with no need to replace or re-register them.
   • Credit on UPI: Payments using RuPay credit cards linked to UPI or pre-sanctioned credit lines are outside this framework and continue under credit product rules.
5. Rules Merchants Must Follow:
   • No passing on to customers: Merchants cannot add a “UPI charge”, surcharge or convenience fee to recover MDR. Customers must pay only the displayed price.
   • Who collects MDR: MDR is charged by the merchant’s acquiring bank or payment aggregator, as per the merchant agreement.
   • Classification matters: Whether MDR applies depends on how the merchant account is categorised (P2PM or P2M, and the merchant category). Merchants should confirm their category with their bank or payment aggregator.
6. Dedicated Fund for Small Merchants:
   • A dedicated fund will support digital payment infrastructure in Tier 3 to 6 centres, including the North-Eastern States, J&K and Ladakh. In Tier 1 and 2 centres it covers merchants under notified Central Government schemes such as PM SVANidhi and PM Vishwakarma.
   • It will give financial assistance to acquiring banks and payment aggregators for merchant onboarding, and incentives for UPI transactions from small merchants.
   • The detailed framework is to be finalised in consultation with the RBI within three months.
7. GST and Income Tax Implications for Merchants:
   • GST on your sales is unchanged: GST is payable on the full value of supply charged to the customer. MDR is a separate expense and does not reduce the taxable value of your sales.
   • GST on MDR: MDR is consideration for services provided by the acquiring bank or payment aggregator. Such financial services are generally taxable at 18%, and the FAQs do not mention any exemption. Registered merchants should check the tax invoices issued by their bank or payment aggregator and claim input tax credit, which must reflect in GSTR-2B/IMS.
   • Income tax: MDR is a business expenditure, allowable like other bank and payment processing charges. Record it separately, for example as “payment gateway / MDR charges”, rather than netting it against sales.
   • Reconciliation: Settlements will be received net of MDR (and GST on MDR). Reconcile daily or monthly settlements with your sales register and bank statements so that sales are not under-reported.
   • Large businesses: The obligation for businesses above the prescribed turnover (₹50 crore) to provide prescribed electronic modes of payment continues under section 187 of the Income-tax Act, 2025 (earlier section 269SU), with a penalty of ₹5,000 per day for failure.
8. Current Status (as of 10 October 2026):
   • A writ petition has been filed in the Supreme Court challenging the notifications of 14 and 15 September 2026.
   • Media reports in early October 2026 suggest the Government and NPCI are considering deferring the rollout to January 2027, and possibly exempting smaller businesses. No official decision has been announced so far. Unless officially changed, 15 October 2026 remains the effective date.
   • We will update this article if the date or the rates change.

What This Means for Businesses

• Check your merchant category (P2PM or P2M, and any special category such as fuel, insurance or education) with your bank or payment aggregator before 15 October 2026.
• Review pricing and margins on high-value sales above ₹2,000. On a ₹10,000 sale, MDR is ₹40 plus GST.
• Do not add surcharges for UPI payments. This is not permitted.
• Remember RuPay debit cards remain free of MDR with no limit.
• Update your accounting to book MDR and GST on MDR separately, claim eligible ITC, and reconcile net settlements with sales.

Note: This article is based on the Ministry of Finance (Department of Financial Services) FAQs on “Merchant Discount Rate (MDR) on Select UPI (P2M) Transactions” dated 15 September 2026 and the notification dated 14 September 2026 under section 10A of the Payment and Settlement Systems Act, 2007. The GST and income tax points are our general professional view and not a substitute for advice on specific facts. Rates and dates may change; please refer to official updates from the Ministry of Finance, RBI and NPCI.