The National Payments Corporation of India (NPCI) has clarified that the introduction of Merchant Discount Rate (MDR) on certain high-value UPI merchant transactions will not make everyday digital payments costly for consumers or place an additional GST burden on most small merchants.
The clarification comes after concerns surfaced that GST applicable on MDR could increase the cost of accepting UPI payments, particularly for small businesses and merchants. NPCI said these concerns do not reflect how the new framework operates.
According to the payments body, MDR will apply only to specified Person-to-Merchant (P2M) transactions above Rs 2,000, while transactions up to Rs 2,000 will continue to have zero MDR. As a result, no GST arises on MDR for such transactions.
UPI Payments Up to Rs 2,000 Continue at Zero MDR
Under the framework introduced in September 2026, UPI transactions between individuals (P2P) remain completely free, irrespective of the transaction amount.
For merchant payments, transactions up to Rs 2,000 continue under the zero-MDR framework. The government has stated that approximately 96% of P2M transactions will remain unaffected by the new arrangement.
This means that customers paying small amounts through UPI should not see an additional charge merely because of the new MDR framework.
NPCI has therefore rejected the suggestion that the new framework amounts to a GST being imposed directly on UPI payments.
What Happens to UPI Transactions Above Rs 2,000?
The new framework provides for a 0.4% MDR on specified P2M transactions above Rs 2,000. The MDR is not a tax collected by the government. Instead, it is distributed among participants in the payment ecosystem, including banks and payment service providers.
For transactions of Rs 75,000 and above, the MDR is capped at Rs 300 per transaction under the framework.
The government has also prescribed different treatment for certain essential and thin-margin sectors. Transactions above Rs 2,000 in sectors such as fuel, railways, telecommunications, insurance and agricultural inputs attract a flat MDR of Rs 5 per transaction.
GST on MDR: Why NPCI Says Merchants Are Not Bearing the Cost
A key part of NPCI's clarification relates to the GST payable on MDR.
Where GST is applicable on the MDR charged to a GST-registered merchant, the tax can form part of the merchant's input tax credit mechanism, subject to the normal GST rules and eligibility conditions.
In simple terms, an eligible registered business can use the input tax credit arising from GST paid on eligible MDR-related services against its output GST liability.
Therefore, NPCI has argued that describing GST on MDR as an additional tax cost that automatically becomes an out-of-pocket expense for businesses is misleading.
However, the availability and utilisation of input tax credit remain subject to applicable GST provisions and the merchant meeting the relevant conditions.
Small Merchants With Low UPI Receipts Remain Outside MDR
The framework also provides protection for smaller merchants.
According to the government, merchants receiving up to Rs 1 lakh per month through UPI QR payments continue to benefit from zero MDR. This includes small businesses such as street vendors and neighbourhood shops.
For these merchants, the question of GST on MDR does not arise where no MDR is charged.
This provision is particularly relevant for micro businesses that rely heavily on QR-code payments but have relatively low monthly digital collections.
Is GST Being Charged on UPI Payments?
The distinction between GST on a payment itself and GST on an MDR-related service charge is important.
The current framework does not introduce a GST charge on the UPI payment made by a consumer. Rather, where MDR applies to an eligible merchant transaction, GST treatment can arise in relation to the underlying MDR/service charge.
The government has separately clarified that UPI users will not be charged transaction fees and that P2P payments will remain free.
Therefore, consumers should not interpret the new MDR framework as a direct GST being added to their UPI payment.
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 (@NPCI_NPCI) September 22, 2026
MDR applies only to P2M transactions above ₹2,000. Transactions up to ₹2,000 continue to have zero MDR and therefore…
Why the Clarification Matters for Small Businesses
UPI has become an important payment channel for India's small retailers, service providers and self-employed businesses. Any change in the cost of accepting digital payments can therefore have a direct impact on merchants.
The latest framework attempts to distinguish between everyday low-value merchant payments and larger commercial transactions.
With transactions up to Rs 2,000 continuing at zero MDR and small merchants with monthly UPI receipts up to Rs 1 lakh also covered by the zero-MDR framework, the government estimates that the vast majority of merchant transactions will remain unaffected.
New UPI MDR Framework: Key Points
| Particulars | New Framework |
|---|---|
| P2P UPI transactions | No MDR |
| P2M transactions up to Rs 2,000 | Zero MDR |
| P2M transactions above Rs 2,000 | 0.4% MDR for specified transactions |
| MDR cap | Rs 300 per transaction for transactions of Rs 75,000 and above |
| Small merchants with UPI receipts up to Rs 1 lakh/month | Zero MDR |
| Consumer transaction charge | No charge |
| Approx. P2M transactions unaffected | 96% |
The framework was detailed by the government on September 15, 2026, following the relevant notification and NPCI's subsequent circular.
What This Means for Consumers and Merchants
For consumers, the immediate takeaway is that UPI remains free for person-to-person payments and the majority of merchant transactions.
For small merchants, transactions falling within the zero-MDR framework will continue without MDR. For larger eligible merchant transactions, MDR may apply, but GST on that MDR should not automatically be treated as an unrecoverable business cost where the merchant is eligible to claim the applicable input tax credit.
The NPCI clarification is therefore aimed at separating the MDR applicable to certain merchant transactions from the broader perception that UPI payments themselves are becoming subject to GST.
As the new framework takes effect, merchants should check how their transaction category, monthly UPI receipts and GST registration status affect the treatment of MDR and related input tax credit.
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