UPI MDR May Attract 18% GST; Eligible Merchants Can Claim Input Tax Credit

India's upcoming UPI Merchant Discount Rate (MDR) framework is likely to have an additional tax component, with the MDR charged to eligible merchants potentially attracting 18% Goods and Services Tax (GST).

The development means that merchants covered by the new UPI fee structure could face two related charges: the MDR applicable to qualifying transactions and GST calculated on that MDR.

However, tax experts have pointed out that eligible GST-registered businesses may be able to claim input tax credit (ITC) for the GST paid on the MDR, potentially reducing its effective tax burden.

The distinction is important because the 18% GST does not mean an 18% tax on the value of the UPI transaction itself. Instead, it is a tax on the MDR or payment-processing service fee.

What Is the New UPI MDR?

Under the revised framework announced by the National Payments Corporation of India (NPCI), specified person-to-merchant (P2M) UPI transactions above Rs 2,000 will attract an MDR of 0.4% from October 15, 2026.

For transactions of Rs 75,000 and above, the MDR is capped at Rs 300 per transaction.

For example, if an eligible merchant receives a Rs 10,000 UPI payment, the standard MDR would be Rs 40.

If 18% GST applies to that Rs 40 MDR, the GST component would be Rs 7.20.

The combined MDR plus GST would therefore be Rs 47.20, subject to the merchant's eligibility, transaction category and applicable tax treatment.

Is 18% GST Charged on the Entire UPI Payment?

No.

The proposed GST applies to the MDR/service fee, not to the entire amount transferred through UPI.

This distinction can be illustrated as follows:

TransactionMDR at 0.4%18% GST on MDRTotal MDR + GSTRs 5,000Rs 20Rs 3.60Rs 23.60Rs 10,000Rs 40Rs 7.20Rs 47.20Rs 25,000Rs 100Rs 18Rs 118Rs 50,000Rs 200Rs 36Rs 236Rs 75,000Rs 300Rs 54Rs 354

These calculations illustrate the tax treatment if the full 18% GST is applicable to the stated MDR.

The actual accounting treatment will depend on the merchant's status and the applicable GST provisions.

Who Will Be Affected by MDR?

The standard MDR will apply to specified P2M UPI transactions above Rs 2,000.

P2M means a payment made by an individual to a merchant.

For example, buying goods from a retailer or paying an eligible business through a UPI QR code can constitute a merchant transaction.

The new framework does not impose MDR universally on every UPI payment.

Person-to-Person UPI Payments Remain Outside MDR

A key distinction is between P2P and P2M payments.

Person-to-person transactions will remain free under the new framework, regardless of the amount.

Therefore, sending Rs 10,000 to a family member or friend through UPI does not become subject to the 0.4% MDR merely because the amount exceeds Rs 2,000.

The new MDR framework is focused on specified merchant payments.

UPI Payments Up to Rs 2,000 Remain Free

Specified merchant transactions of Rs 2,000 or less remain outside the standard 0.4% MDR.

This means a consumer purchasing goods worth Rs 1,500 through UPI would not face the new standard MDR.

The distinction is designed to keep a large proportion of everyday low-value digital payments outside the new fee structure.

Small Merchants Continue to Receive Protection

The framework also provides zero-MDR treatment for eligible small merchants operating under the Person-to-Person-Merchant (P2PM) framework.

Merchants receiving up to Rs 1 lakh per month through UPI QR codes under the specified arrangement will continue to receive zero-MDR treatment.

This is particularly relevant for small retailers, street vendors and neighbourhood businesses that depend heavily on QR-based payments.

What Is Input Tax Credit?

Input Tax Credit, or ITC, allows an eligible GST-registered business to offset GST paid on eligible business inputs against its GST liability, subject to the conditions prescribed under GST law.

In the case of UPI MDR, if GST is charged on the payment-processing fee, an eligible merchant may be able to claim the GST component as ITC.

Tax experts have said this provision could help reduce the effective burden of GST on MDR for eligible businesses.

However, ITC is not automatically available to every merchant. Eligibility depends on factors such as GST registration, the nature of the business, use of the service for taxable business activities and compliance with applicable GST requirements.

Example: How ITC Could Reduce the Effective Cost

Consider a GST-registered business receiving an eligible UPI payment of Rs 10,000.

At a 0.4% MDR:

• Transaction value: Rs 10,000

• MDR: Rs 40

• GST at 18% on MDR: Rs 7.20

• Total MDR plus GST: Rs 47.20

If the merchant is eligible to claim the entire Rs 7.20 as input tax credit, the GST component can be used to offset eligible output GST liability.

In such a case, the net economic cost of the MDR-related payment would primarily remain the Rs 40 MDR, subject to the merchant's actual tax position and ITC eligibility.

This is why the impact of the new fee can differ between GST-registered businesses and businesses that cannot claim ITC.

What About Businesses That Cannot Claim ITC?

Businesses that are not eligible for input tax credit may not be able to recover the GST paid on MDR through the ITC mechanism.

This could make the effective cost of accepting qualifying UPI payments higher for such businesses.

The impact would depend on factors including:

• GST registration status

• Whether the business makes taxable supplies

• Availability of eligible ITC

• Transaction volumes

• Average transaction size

• Merchant margins

Consequently, the headline MDR rate does not necessarily represent the same effective cost for every business.

MDR and GST Are Two Different Charges

It is important not to confuse MDR with GST.

MDR is a payment-processing fee associated with eligible merchant transactions.

GST is an indirect tax that may apply to the underlying payment-processing service.

Therefore, if a merchant incurs Rs 40 in MDR and 18% GST applies, the GST is Rs 7.20—not Rs 1,800 or 18% of the Rs 10,000 transaction.

The distinction is particularly important when explaining the new UPI rules to merchants and consumers.

Will Consumers Pay the GST on MDR?

The announced UPI framework places the MDR burden within the merchant payment ecosystem rather than imposing a separate UPI charge on consumers.

The government has maintained that consumers will not be directly charged MDR.

However, businesses could separately make commercial decisions about pricing and operating costs. That potential indirect effect is different from a direct UPI fee charged to the customer.

Industry groups have raised concerns about the effect of MDR on merchant costs, particularly for businesses operating with relatively low margins.

Special MDR Rates for Certain Categories

The standard 0.4% MDR does not apply uniformly to every qualifying transaction.

Certain sectors have been assigned separate rates or fee structures.

For example, specified transactions involving sectors such as railways, telecommunications, insurance and fuel can attract a flat MDR of Rs 5 for applicable payments above the threshold.

Certain capital-market transactions have also been assigned a separate 0.02% MDR, subject to the applicable cap.

This means the GST treatment must also be considered in the context of the particular MDR category rather than assuming that every UPI transaction above Rs 2,000 attracts identical charges.

UPI MDR Framework at a Glance

CategoryMDR TreatmentP2P UPI paymentsZero MDREligible P2M payments up to Rs 2,000Zero MDREligible P2M above Rs 2,0000.4%Eligible transactions of Rs 75,000 or moreMDR capped at Rs 300Eligible small P2PM merchants up to Rs 1 lakh/monthZero MDRSelected sectorsSpecial MDR rates, including Rs 5 flat feeCapital-market transactions0.02%, subject to applicable capGST on applicable MDRMay attract 18% GSTITC for eligible GST-registered merchantsAvailable subject to GST rules

Why Is GST on MDR Important for Merchants?

The addition of GST makes it important for businesses to understand their effective payment-processing cost.

A merchant focusing only on the 0.4% MDR may overlook the GST component.

For GST-registered businesses that qualify for ITC, however, the GST component can potentially be offset against eligible output tax liability.

For businesses without ITC eligibility, the GST could represent an additional cost.

This creates different economic outcomes depending on the merchant's tax profile.

New MDR Comes After Years of Zero-MDR UPI

UPI has operated under a broad zero-MDR framework for several years.

The upcoming change is intended to create a revenue mechanism for participants in the digital payments ecosystem.

Reuters reported that the new fee structure is expected to generate significant revenue for banks and fintech companies, with the exact impact depending on the distribution of fees and applicable exemptions.

The government has maintained that the framework is intended to support the sustainability and continued expansion of India's digital payment infrastructure.

Why the New Framework Is Being Introduced

UPI has grown rapidly in transaction volumes, creating substantial infrastructure, technology, fraud-monitoring and operational requirements.

The new MDR framework changes the commercial model by allowing payment ecosystem participants to earn revenue from specified merchant transactions.

At the same time, policymakers have retained exemptions for P2P payments, low-value transactions and eligible small merchants.

The result is a differentiated fee structure rather than a universal charge on all UPI payments.

What Merchants Should Check

Businesses preparing for the new MDR regime should review several aspects before October 15, 2026.

They should determine:

• Whether their UPI transactions fall under P2M or another category

• Whether the transaction exceeds the Rs 2,000 threshold

• Whether their business qualifies for a zero-MDR exemption

• Which MDR rate applies to their industry

• Whether GST will be charged on the MDR

• Whether they are eligible for input tax credit

• How their bank or payment service provider will show MDR and GST on settlement statements

Maintaining proper GST invoices and payment records will also be important for businesses seeking eligible ITC.

What Customers Need to Know

For consumers, the most important point is that 18% GST on MDR does not mean an 18% GST or fee on the UPI payment amount.

The GST, where applicable, is calculated on the MDR charged to the merchant.

For example, on a Rs 10,000 eligible transaction:

• UPI payment: Rs 10,000

• MDR: Rs 40

• GST on MDR: Rs 7.20

The GST is therefore a tax on the payment-processing fee rather than on the Rs 10,000 transaction itself.

UPI's Expanding Role in India's Digital Economy

The MDR and GST changes come as UPI continues to operate at enormous scale.

UPI processed approximately 24.5 billion transactions worth Rs 29.823 lakh crore in August 2026, according to Reuters.

The introduction of MDR therefore has implications beyond individual merchants. It represents a shift in the commercial structure supporting one of India's most widely used digital payment systems.

Key Takeaways

• Specified UPI merchant transactions above Rs 2,000 will attract a standard 0.4% MDR from October 15, 2026.

• The MDR is capped at Rs 300 for applicable transactions of Rs 75,000 and above.

• 18% GST may apply to the MDR, rather than to the full UPI transaction amount.

• A Rs 10,000 transaction with Rs 40 MDR would have Rs 7.20 GST if the 18% rate applies.

• Eligible GST-registered merchants may claim input tax credit on GST paid on MDR, subject to applicable conditions.

• Merchants without ITC eligibility may bear the GST as an additional cost.

• P2P UPI payments remain outside the MDR framework.

• Eligible P2M payments up to Rs 2,000 remain free.

• Eligible small P2PM merchants receiving up to Rs 1 lakh per month through UPI QR codes remain under zero MDR.

• Certain sectors and capital-market transactions have separate MDR rates.

• The new framework is scheduled to take effect from October 15, 2026.

Bottom Line

The upcoming UPI MDR regime could create an additional tax consideration for merchants because 18% GST may apply to the MDR charged on eligible transactions.

The key point is that the GST is calculated on the payment-processing fee, not on the entire UPI payment. For a Rs 10,000 eligible transaction, for example, a 0.4% MDR would be Rs 40, and 18% GST on that MDR would be Rs 7.20.

For GST-registered merchants that satisfy the applicable conditions, the GST paid on MDR may be claimed as input tax credit, potentially reducing its effective cost. Businesses that cannot claim ITC may face a higher net payment-processing expense.

The final impact will therefore vary according to transaction type, merchant category, GST status and ITC eligibility as the new framework takes effect.

Disclaimer: This article is for informational purposes only and does not constitute tax, legal or financial advice. GST treatment and input tax credit eligibility depend on applicable law, notifications, invoices and the taxpayer's individual circumstances. Merchants should consult a qualified tax professional and refer to official GST and NPCI communications for the latest rules.