MDR on UPI: The New Framework, Who Pays, and the GST Layer
- The confirmed MDR rates from the NPCI circular — 0.4% on P2M above ₹2,000, ₹5 flat for select Industry Program merchant categories, 0.02% for capital markets — effective 15 October 2026.
- Which transactions remain completely free: all P2P, all P2M under ₹2,000, and small merchants receiving under ₹1 lakh per month.
- The GST treatment of MDR — 18% on the charge — and how registered businesses claim input tax credit.
- How to record MDR in your books and what to confirm with your payment aggregator.
On 15 September 2026, the government released the UPI MDR framework through a PIB notification. The framework takes effect on 15 October 2026, administered by the UPI and Services Steering Committee headed by NPCI. It introduces a charge on a narrow slice of merchant transactions while protecting individuals, street vendors, and small businesses entirely. Approximately 96% of all person-to-merchant (P2M) transactions remain free of any MDR.
This is not a tax. MDR is not collected by the government or NPCI. It is distributed among the payment ecosystem — acquiring banks, issuing banks, and UPI application providers — to fund the infrastructure that processes over 10 billion transactions a month.
What Stays Free
The free perimeter is broad and clearly defined.
All person-to-person (P2P) transfers: Every rupee transferred between individuals — family remittances, splitting bills, paying a friend — remains completely free regardless of amount. P2P accounts for 70% of total UPI transaction value and is entirely outside the MDR framework.
All P2M transactions up to ₹2,000: Customers paying a merchant below this threshold pay nothing. The merchant receives the full amount. No MDR, no platform fee, no hidden charge.
Small merchants (P2PM category): Street vendors, neighbourhood kirana stores, and other small businesses receiving payments via UPI QR codes under the Person-to-Person-Merchant category pay zero MDR on all transactions, provided their monthly UPI receipts remain under ₹1 lakh. This threshold protects the micro-enterprise layer that the original MDR waiver was designed to bring into digital payments.
What Attracts MDR — The Confirmed Rates
UPI MDR FRAMEWORK — EFFECTIVE 15 OCTOBER 2026
| TRANSACTION TYPE | MDR RATE | CAP |
|---|---|---|
| P2P (all amounts) | 0% | — |
| P2M up to ₹2,000 | 0% | — |
| Small merchants (P2PM, under ₹1L/month) | 0% | — |
| Standard P2M above ₹2,000 | 0.4% | ₹300 per transaction (for ₹75,000+) |
| Industry Program (select categories per NPCI Annexure B) | ₹5 flat | ₹5 per transaction |
| Capital markets (MF, securities, stockbrokers) | 0.02% | ₹300 per transaction |
Standard P2M above ₹2,000 (0.4%): This is the rate most registered businesses will encounter. A ₹5,000 bill paid via UPI attracts ₹20 MDR. A ₹75,000 invoice attracts ₹300 — the ceiling — so any transaction of ₹75,000 or more pays a flat ₹300 regardless of actual value. The cap applies per transaction, not per day or per batch.
Industry Program (₹5 flat): The NPCI circular prescribes a materially different rate for specific merchant categories listed under its Industry Program (Annexure B). These categories pay a flat ₹5 per transaction — not a percentage — regardless of transaction size. For businesses in qualifying segments handling large collections or repayments via UPI, this is significantly cheaper than the 0.4% general rate. A ₹50,000 collection attracts ₹5 MDR rather than ₹200. Check with your acquirer or payment aggregator whether your business category falls within the Industry Program scope.
Capital markets (0.02%): Payments to mutual funds, stockbrokers, and securities dealers attract a sharply lower ad valorem rate, also capped at ₹300. A ₹10 lakh SIP mandate payment via UPI attracts ₹200 MDR (0.02%), not ₹4,000 (0.4%).
Customers Cannot Be Charged MDR
This is worth stating clearly for businesses that might consider passing the cost on. Banks have been explicitly advised to ensure merchants do not pass MDR to customers. UPI application providers are prohibited from imposing platform fees or hidden charges on individuals. If a merchant adds a "UPI surcharge" line to a bill, that is a violation of the framework.
MDR is a cost of acceptance, like card terminal rental or banking charges — it sits in your P&L, not on your customer's receipt.
The GST Layer: 18% on MDR
MDR is a financial service. Under the GST framework, payment processing and acquiring services fall under SAC code 9971 and attract 18% GST. Your acquiring bank or payment aggregator will charge you MDR plus 18% GST on that MDR amount.
Example — standard merchant transaction:
A customer pays ₹10,000 via UPI. MDR at 0.4% = ₹40. GST at 18% on ₹40 = ₹7.20. Total deducted at settlement = ₹47.20. Your account receives ₹9,952.80.
MDR + GST CALCULATION — ₹10,000 STANDARD MERCHANT TRANSACTION
| ITEM | AMOUNT |
|---|---|
| UPI transaction value | ₹10,000.00 |
| MDR @ 0.4% | ₹40.00 |
| GST on MDR @ 18% | ₹7.20 |
| Net settlement credited to your account | ₹9,952.80 |
| ITC recoverable (GST-registered business) | ₹7.20 |
Claiming Input Tax Credit (ITC):
If you are GST-registered and the MDR relates to your taxable supply, you can recover the ₹7.20 GST as Input Tax Credit, provided:
- Your acquiring bank or payment aggregator has filed their GSTR-1 and the credit appears in your GSTR-2B.
- You hold a valid tax invoice from the bank showing their GSTIN, your GSTIN, the MDR amount, and the GST breakout.
- You are not making exempt supplies — if you are partially exempt, proportionate reversal under Rule 42 applies.
How to Record MDR in Your Books
MDR is a cost of acceptance — treat it as an operating expense, not a revenue deduction. Netting MDR against sales understates both turnover and expense, which creates GST reconciliation problems and distorts your financial analysis.
Correct journal entry:
- Debit: Bank Account — ₹9,952.80 (net settlement)
- Debit: Payment Processing Charges — ₹40.00 (MDR, net of GST)
- Debit: GST Input Tax Credit (IGST/CGST) — ₹7.20
- Credit: Sales Revenue — ₹10,000.00
Chart of accounts: Create a dedicated ledger — "UPI MDR Charges" or "Payment Processing — MDR" — separate from generic bank charges. As the framework beds in, you will want to run reports on MDR cost by month and cross-check against your payment aggregator's settlement statements.
Three Things to Confirm with Your Payment Aggregator
1. GST invoice issuance: Your aggregator must issue a proper GST invoice (or monthly statement with GST breakout) for ITC claims to hold up in scrutiny. Confirm they have your GSTIN on file and will report MDR charges with 18% GST broken out.
2. Settlement reporting: Check whether your dashboard distinguishes transactions above and below ₹2,000 and whether Industry Program rates will be applied correctly if your business category qualifies.
3. No surcharging policy: Ensure your billing system, point-of-sale terminals, and invoicing software do not add a UPI surcharge line to customer bills. The framework expressly prohibits passing MDR to customers.
The 0.4% standard rate sits well below credit card MDR (typically 1.5% to 2.5%), and the ₹300 cap makes UPI meaningfully cheaper than cards for large transactions. For most GST-registered businesses, effective MDR after ITC recovery on the 18% GST component will be closer to 0.33% — still the lowest-cost digital acceptance channel by a significant margin.