The National Payments Corporation of India (NPCI) has clarified that small merchants need not be concerned about the newly introduced Merchant Discount Rate (MDR) and Goods and Services Tax (GST) provisions on UPI payments. NPCI stated that GST will not be levied on the entire transaction amount, but only on the MDR charge. The new rules are set to come into effect from October 15, 2026. Under these rules, MDR will be charged on certain UPI merchant payments exceeding Rs 2,000. Merchant payments up to Rs 2,000 will not attract any MDR. For eligible transactions, the MDR will be 0.4 percent, subject to a maximum cap of Rs 300 per transaction. Person-to-person UPI payments will continue to be exempt from any MDR.
For instance, consider a scenario where goods worth Rs 10,000 are purchased at a shop and paid for via UPI. The MDR on this transaction, at 0.4 percent, would amount to Rs 40. Importantly, GST will not be calculated on the full transaction amount of Rs 10,000; it will be levied only on the Rs 40 MDR. If GST on the MDR is charged at 18 percent, it would amount to Rs 7.20 on the Rs 40. Eligible GST-registered merchants will have the option to adjust this GST as part of their business’s GST accounting, in accordance with applicable rules. Small merchants eligible to receive up to Rs 1 lakh per month via UPI will not be charged MDR at all — meaning that in the absence of MDR, no GST will apply either. This is expected to bring relief to small grocery shops, street vendors, and merchants who process low-value UPI transactions.
Customers will not be charged any UPI fee. The new MDR is a charge applicable only on the merchant’s side. Customers making payments via UPI cannot be charged MDR. Similarly, person-to-person UPI payments will remain free of charge as before, and merchant payments up to Rs 2,000 will also continue to be exempt from MDR. Banks and payment companies have been advised to ensure that this charge is not passed on to customers under the guise of MDR.
From October 15, MDR will come into effect on eligible merchant UPI payments exceeding Rs 2,000 in value. However, GST will not apply to the total amount paid by the customer. Simply put, if a customer pays Rs 10,000 via UPI, GST will not be imposed on the full Rs 10,000 — it will be calculated only on whatever MDR amount applies to the merchant. Small merchants eligible to receive UPI payments of up to Rs 1 lakh per month will not be subject to MDR, and consequently, will not face any GST liability on it either. According to details shared by the government, nearly 96 percent of all person-to-merchant (P2M) UPI transactions will fall outside the scope of MDR.