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UPI New Rules From October 15: 18% GST on MDR for Payments Above ₹2,000? Check Who Will Pay

Posted on 25th Sep 2026 02:18 pm by rohit kumar

Millions of Indians use the Unified Payments Interface (UPI) for everyday payments, from small shops and restaurants to large retailers. A new merchant-side charge framework is now set to change the economics of some high-value UPI transactions.

 

Under the new framework, a 0.4% Merchant Discount Rate (MDR) will apply to specified person-to-merchant (P2M) UPI transactions above ₹2,000. However, a separate question is whether 18% GST will be levied on the MDR. This GST issue would apply to the service charge rather than the entire UPI transaction value.

 

Importantly, there is no 18% GST on the full UPI payment amount. The proposed GST, if approved, would be calculated on the applicable MDR.

 

What Is the New UPI MDR Rule?

 

According to the Finance Ministry, the new framework keeps all person-to-person (P2P) UPI transactions completely free, irrespective of the amount transferred.

 

Merchant payments up to ₹2,000 will also remain free of MDR. The government estimates that around 96% of P2M UPI transactions will remain unaffected.

 

For specified merchant transactions above ₹2,000, the MDR has been set at 0.4%. For transactions of ₹75,000 and above, the MDR is capped at ₹300 per transaction.

 

Small merchants covered under the P2PM category will continue to receive zero MDR, subject to the applicable conditions. The framework is therefore not a blanket charge on every UPI payment.

 

Will 18% GST Be Charged on UPI Payments?

 

No. The proposed GST would not be charged on the entire UPI payment amount.

 

The distinction between the transaction value and MDR is important. MDR is a fee associated with the payment service and is borne on the merchant side.

 

If GST is eventually imposed on the MDR, the tax would be calculated on that fee rather than on the amount transferred through UPI.

 

MDR stands for Merchant Discount Rate. It is a fee associated with processing certain merchant payments.

 

Under the new UPI framework, the MDR is distributed among participants in the payment ecosystem, including banks, payment service providers and UPI application providers. The government has clarified that MDR is not a tax collected by the government or NPCI.

 

This is different from a GST charge, which is a tax on a taxable supply of goods or services.

 

Which UPI Transactions Will Remain Free?

 

The new framework specifically protects several categories of UPI payments.

 

Person-to-person payments

 

All P2P UPI transactions will remain free, regardless of the amount transferred.

 

Merchant payments up to ₹2,000

 

P2M payments of up to ₹2,000 will remain free of MDR.

 

Small merchants

 

Small merchants receiving up to ₹1 lakh per month through UPI QR codes under the P2PM category will continue to enjoy zero MDR, subject to the framework\'s conditions.

 

The government has said approximately 96% of all P2M transactions will remain unaffected by the new MDR framework.

 

What Happens to Payments Above ₹2,000?

 

For specified merchant transactions above ₹2,000, the standard MDR is 0.4%.

 

For example:

 

₹5,000 payment → MDR of ₹20

₹10,000 payment → MDR of ₹40

₹25,000 payment → MDR of ₹100

₹50,000 payment → MDR of ₹200

₹75,000 payment → MDR of ₹300

Payments above ₹75,000 → MDR capped at ₹300

 

If an 18% GST were applicable to the MDR, it would be calculated on these fees rather than on the underlying purchase amount.

 

What About the ₹300 MDR Cap?

 

The government has specified that the MDR for qualifying transactions of ₹75,000 and above will be capped at ₹300 per transaction.

 

If GST at 18% were ultimately applicable to the full MDR at the cap, the GST would amount to ₹54, taking the combined MDR-plus-GST cost to ₹354.

 

However, this should be treated as an of the potential tax treatment, not as confirmation that an 18% GST charge has already been imposed on MDR.

 

Is 18% GST on UPI MDR Confirmed?

 

This is the most important distinction for consumers and merchants.

 

The 0.4% MDR framework has been announced, but the separate question of GST on the MDR should not be presented as a confirmed 18% tax on UPI payments.

 

In April 2025, the Finance Ministry had rejected claims that the government was considering GST on UPI transactions above ₹2,000 and clarified that GST, where applicable, relates to charges such as MDR rather than the transaction amount itself.

 

The current discussion is therefore about the tax treatment of the merchant-side MDR, not about imposing an 18% GST on every UPI payment above ₹2,000.

 

Will Customers Have to Pay More?

 

The government has repeatedly stated that UPI users will not face transaction charges.

 

The new framework is designed around specified merchant-side transactions, while P2P payments and most merchant transactions remain outside the MDR framework.

 

Whether merchants ultimately pass any increased payment-processing costs into product prices is a separate business decision and cannot be assumed as a direct consequence of the GST proposal.

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