UPI MDR From October 15 Stays On Track, 18% GST May Face Review As 96% Transactions Remain Unaffected

The October 15 deadline for introducing Merchant Discount Rate (MDR) on select UPI transactions will remain unchanged, while the 18% Goods and Services Tax (GST) charged on the fee could come up for review by the GST Council. The latest development comes as the government seeks to clarify the impact of the new UPI charges on merchants and consumers.

Under the new framework, a 0.4% MDR will apply to specified person-to-merchant (P2M) UPI transactions above ₹2,000, subject to a maximum charge of ₹300 per transaction. However, around 96% of UPI merchant transactions will remain outside the MDR framework, while person-to-person (P2P) payments will continue to be free.

The 18% GST applies to the MDR rather than the value of the UPI transaction itself. The issue is not currently on the agenda for the GST Council's October 7 meeting, but government sources said the Council could still consider reviewing the tax.

October 15 UPI MDR rollout remains unchanged

The government does not plan to extend the October 15 implementation date for the new UPI MDR framework, according to government sources. The change will apply only to specified merchant payments above ₹2,000, while transactions below that threshold will continue under the zero-MDR framework.

For eligible transactions, the normal MDR rate is 0.4%, with the charge capped at ₹300 for transactions of ₹75,000 and above. Essential sectors including railways, telecom, insurance, fuel and agricultural inputs will have a flat ₹5 MDR on transactions above ₹2,000.

The government has also maintained that the MDR will not be passed on to customers. Banks have been advised to ensure that merchants do not transfer the charge to consumers.

The distinction between the payment amount and the fee is important. A customer making a ₹5,000 eligible UPI payment, for example, would not pay 0.4% as an additional charge. The MDR would be ₹20 on the merchant side before any applicable GST.

This means the new framework does not amount to a blanket charge on UPI payments. Its impact is concentrated among specified merchant transactions above the ₹2,000 threshold.

UPI charges above ₹2,000

The relatively limited coverage of the new MDR framework is central to the government's case for the change. Around 96% of UPI merchant transactions by volume are below the ₹2,000 threshold and will therefore continue without MDR.

Person-to-person UPI payments will remain free irrespective of the transaction value. Small merchants receiving up to ₹1 lakh a month through UPI QR are also exempt from MDR, while RuPay debit-card transactions continue to carry zero MDR.

The National Payments Corporation of India (NPCI) has separately said the GST treatment will not increase costs for most small merchants. Merchants that are liable to pay GST on MDR can claim the tax as input tax credit, while those below the ₹1 lakh monthly UPI receipt threshold do not face MDR or GST liability on the fee.

The 18% GST, therefore, is not levied on the full value of a UPI purchase. It applies to the MDR charged on eligible transactions.

For example, if a merchant accepts a ₹5,000 eligible UPI payment, the 0.4% MDR would amount to ₹20. The GST at 18% on that MDR would be ₹3.60, taking the total MDR-related amount to ₹23.60 before considering any input tax credit available to the merchant.

Where does the UPI MDR money go

The MDR collected from eligible UPI transactions will remain within the payments ecosystem rather than going to the government. According to sources, the issuing bank will receive 40% of the MDR, the merchant's acquiring bank 30%, the UPI app or third-party application provider 20%, and the payer PSP bank 10%.

The government share of the MDR is zero. The change therefore represents a shift from UPI's long-standing zero-MDR model for merchant transactions towards a revenue mechanism intended to support the cost of operating and expanding the payments network.

The government has argued that existing MDR does not fully cover the cost of sustaining UPI infrastructure. The proposed revenue stream is expected to support areas including payment infrastructure, cybersecurity, fraud prevention and customer support, while also helping expand UPI services.

The immediate focus, however, remains on the GST component. While the October 15 MDR rollout is staying on schedule, the GST Council could revisit the 18% tax treatment, leaving that part of the framework open to further discussion.

For consumers, the government position remains that UPI payments will continue to be free. For merchants, the practical impact will depend on whether the transaction falls above the ₹2,000 threshold, whether the merchant qualifies for the small-business exemption and whether the GST paid on MDR can be claimed as input tax credit.

The October 15 rollout is therefore still on track, but the tax treatment of the new UPI MDR framework could see another round of review before implementation.

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