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NPCI Says GST on UPI MDR Spares Small Merchants
UPI payments made to shops are called merchant payments.
Starting October 15, some merchant payments above Rs 2,000 may include a small processing fee called MDR.
GST will apply only to that fee, not to the full amount paid.
For example, a Rs 10,000 payment would have an MDR of Rs 40, and GST would apply to the Rs 40.
More than 96% of UPI merchant payments are Rs 2,000 or less, so they will not have MDR or GST on MDR.
Merchants receiving up to Rs 1 lakh monthly through UPI also do not pay MDR.
Person-to-person UPI transfers will remain free.
GST-registered merchants can generally use the GST paid on MDR as a credit, although businesses selling exempt goods or services may not be able to use it.
From October 15, a 0.4% MDR will apply to P2M UPI transactions above Rs 2,000, capped at Rs 300.
Transactions of up to Rs 2,000 make up more than 96% of UPI merchant transaction volume and remain free of MDR.
Merchants receiving up to Rs 1 lakh monthly through UPI are not liable to pay MDR.
GST is charged at 18% on the MDR service fee, not on the underlying UPI payment amount.
Person-to-person UPI transfers remain free, while eligible merchants can generally offset GST on MDR through input tax credit.
- Who
- The National Payments Corporation of India, the Ministry of Finance, UPI merchants and payment ecosystem participants.
- What
- GST will apply to the Merchant Discount Rate on certain higher-value UPI merchant transactions, while NPCI says most transactions and small merchants will remain unaffected.
- Where
- Across India's UPI payment ecosystem.
- When
- The revised framework is scheduled to apply from October 15; NPCI issued its clarification on September 22, 2026.
- Why
- The clarification responds to reports that GST on UPI MDR would broadly burden small merchants and make digital payments costly.
NPCI and Government Clarification
Concerns Raised in Reports and Tax Analysis
Impact on small merchants
NPCI and Government Clarification
NPCI says small merchants and the overwhelming majority of UPI payments remain unaffected because payments up to Rs 2,000 have zero MDR and merchants receiving up to Rs 1 lakh monthly do not pay MDR.
Concerns Raised in Reports and Tax Analysis
Reports alleged that GST on MDR could burden small merchants and make digital payments more costly.
Whether merchants bear the GST
NPCI and Government Clarification
NPCI says eligible merchants can set off GST paid on MDR against their output GST liability, so they do not ultimately bear that cost.
Concerns Raised in Reports and Tax Analysis
Tax experts noted that businesses selling exempt goods or services may not be able to use input tax credit and could therefore bear the GST cost.
Revenue implications
NPCI and Government Clarification
NPCI emphasized that MDR is a payment-processing fee distributed among ecosystem participants, rather than a government tax or charge.
Concerns Raised in Reports and Tax Analysis
Tax experts estimated that GST collections from MDR could reach several thousand crore rupees annually, with one estimate placing potential gross collections at about Rs 5,184 crore.
Key facts
- MDR threshold
- MDR applies to P2M transactions above Rs 2,000.
- Standard MDR
- 0.4%, subject to a maximum of Rs 300 per transaction.
- GST rate
- 18% on the MDR service fee, not on the UPI transaction value.
- Small-transaction share
- Transactions up to Rs 2,000 account for more than 96% of UPI merchant transaction volume.
- Small-merchant threshold
- Merchants receiving up to Rs 1 lakh per month through UPI are not liable to pay MDR.
- Concessional sectors
- Transactions above Rs 2,000 in sectors including railways, telecommunications, insurance, fuel and agricultural inputs attract a flat MDR of Rs 5.
- Person-to-person payments
- UPI person-to-person transactions remain free regardless of the amount transferred.
Sources
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