UPI MDR GST will apply at 18 per cent on the Merchant Discount Rate charged on eligible UPI merchant transactions from October 15, 2026.
The GST will be calculated only on the MDR or processing fee, not on the full value of the UPI payment.
The new framework applies a 0.4 per cent MDR to specified person-to-merchant UPI transactions above ₹2,000, subject to a maximum MDR of ₹300 for transactions of ₹75,000 or more.
UPI MDR GST Will Apply Only to Charges
The 18 per cent GST will not be added to the amount paid by the customer. Instead, it will apply to the MDR charged to the merchant under the new UPI framework.
For example, on an eligible ₹10,000 UPI payment, the 0.4 per cent MDR would be ₹40.
The 18 per cent GST on that ₹40 would amount to ₹7.20, taking the merchant’s payment-related cost to ₹47.20.
The customer would still make a UPI payment of ₹10,000.
The government has also directed banks to ensure that MDR charges are not passed on to consumers.
Which UPI Payments Will Attract MDR
Person-to-person UPI transfers will continue to remain free, regardless of the amount transferred. Merchant payments of up to ₹2,000 will also remain outside the MDR framework.
Small merchants receiving up to ₹1 lakh per month through UPI QR codes under the specified small-merchant category will continue to receive zero-MDR treatment.
According to the government, around 96 per cent of merchant transactions will remain unaffected.
Certain essential sectors, including railways, telecommunications, insurance, fuel and agricultural inputs, will have a flat ₹5 MDR on eligible transactions above ₹2,000.
Capital-market transactions involving areas such as mutual funds, securities, stockbrokers and dealers will attract a concessional 0.02 per cent MDR, subject to the applicable cap.
Can Merchants Claim GST Input Tax Credit
GST-registered businesses that pay GST on MDR can generally claim the amount as input tax credit, subject to the normal conditions under GST rules.
This means the 18 per cent GST may not become a permanent cost for businesses eligible to claim input tax credit.
However, businesses dealing in GST-exempt supplies may face limitations on the credit they can claim.
The government has clarified that MDR itself is not a tax collected by the government or NPCI.
It is a charge distributed among participants in the payment ecosystem, including banks and payment service providers.
UPI Users Will Not Pay the GST Directly
The introduction of MDR and the GST treatment has created confusion over whether customers will have to pay additional charges when using UPI.
Under the announced framework, the GST applies to the merchant-side MDR rather than the customer’s UPI payment amount.
The government has also said that individuals will continue to have free UPI usage without monthly quotas or tiered charges.
The new MDR framework is scheduled to begin on October 15, 2026.
The government has said the system is intended to support the long-term sustainability of the UPI payment ecosystem while keeping person-to-person payments and most merchant transactions free.
