UPI Charges are changing — but the biggest misconception is that every UPI payment will now be taxed.

FININ2MIN EXPLAINER • DIGITAL PAYMENTS • GST UPI Charges from 15 October 2026: 0.4% MDR, GST Impact, Exemptions & Practical Examples UPI is not becoming chargeable for ordinary users. The new framework introduces a merchant-side Merchant Discount Rate (MDR) only for select person-to-merchant payments above ₹2,000, while preserving zero charges for P2P transfers, small-value payments and protected small merchants. Here is the one-stop guide to exactly who pays, how much, when GST applies and how businesses should account for it. By Ravi Sisodia • Reviewed by CA Divyanshu Sengar • Updated 19 September 2026 • Effective date of new MDR framework: 15 October 2026 Confirmed framework NPCI/Finance Ministry FAQs specify the new MDR structure and merchant protections. Starts 15 October 2026 The official DFS FAQ states that the finalised threshold structure takes effect from this date. GST watchpoint Current stated position is 18% GST on MDR/service fee, not on the payment value. Any later GST Council relief should be tracked. Finin2min — the answer in 2 minutes Sending money to friends/family/self via UPI: ₹0 MDR, irrespective of amount, subject to normal transaction limits. Customer paying any merchant: the customer should not be charged MDR or a UPI platform fee. Normal P2M merchant payment up to ₹2,000: zero MDR. Normal P2M merchant payment above ₹2,000: merchant-side MDR of 0.4% . ₹75,000 and above: MDR is capped at ₹300 per transaction . Protected small/P2PM merchants: zero MDR even if an individual payment exceeds ₹2,000, provided the merchant remains correctly classified in the exempt P2PM tier. Essential/thin-margin categories: specified categories such as railways, telecom, insurance, fuel, agricultural inputs and certain public utilities get a concessional flat MDR, generally ₹5 for qualifying transactions above ₹2,000. Capital-market payments: 0.02% MDR, capped at ₹300. UPI AutoPay/mandates: the official FAQ says prescribed MDR under this framework does not apply to automated recurring standing instructions. GST: 18% applies to the MDR/payment-processing service fee under the position stated as of 19 September 2026. It is not 18% on your ₹5,000 or ₹50,000 UPI payment . ITC: an eligible GST-registered merchant may claim input tax credit on GST charged on MDR, subject to normal GST conditions. Unregistered persons, composition taxpayers and businesses with restricted/exempt-credit situations may bear the GST as a real cost. On this page: What exactly changed? Who pays and who does not? Small merchant / P2PM rules Special categories: fuel, insurance, utilities, capital markets GST on UPI MDR: full tax impact Practical examples and calculations Accounting entries and reconciliation Common myths Frequently asked questions 1. What exactly changed in UPI charges? India's zero-MDR regime for notified UPI payments had, for years, meant that ordinary bank-account-to- bank-account UPI payments did not carry a merchant discount rate. In 2026, the legal framework was changed to allow a more targeted charging model while keeping users and a large share of small-merchant payments protected. • • • • • • • • • • • 1. 2. 3. 4. 5. 6. 7. 8. 9. The Ministry of Finance first clarified in August 2026 that the amendment to section 10A of the Payment and Settlement Systems Act, 2007 was an enabling framework rather than a blanket charge on users. On 15 September 2026, the final merchant-side MDR structure was announced, with implementation from 15 October 2026. The official position is simple: the new charge is not a tax collected by the Government or NPCI . MDR is a commercial payment-acceptance charge distributed within the payment ecosystem, including banks and payment-service/application providers, to support infrastructure, cyber-security, resilience and customer service. Transaction type MDR from 15 Oct 2026 Who bears it? Customer charged? P2P: person to person ₹0 Nobody No Self-transfer between own UPI- linked accounts ₹0 Nobody No Normal P2M up to ₹2,000 ₹0 Nobody No Normal P2M above ₹2,000 but below ₹75,000 0.40% Merchant/payment ecosystem No Normal P2M ₹75,000 or more ₹300 cap Merchant/payment ecosystem No P2PM protected small merchant ₹0 while eligible Nobody No Specified essential/thin-margin category above ₹2,000 Generally flat ₹5 where specified Merchant/payment ecosystem No Capital-market payment 0.02%, capped ₹300 Merchant/payment ecosystem No UPI AutoPay / recurring mandate No prescribed MDR under the official FAQ — No RuPay credit card / credit line on UPI Separate credit-product rules As per applicable credit framework Not governed by this new direct- account MDR table Important: The ₹2,000 threshold is a merchant-MDR threshold, not a consumer charging threshold. Even where the merchant becomes liable to MDR, the official FAQ says the MDR cannot be passed on to the buyer as a separate UPI charge. 2. Who pays the new UPI MDR? The economic charge sits inside the merchant payment ecosystem. A consumer scanning a merchant QR and paying ₹5,000 from a bank account should still see the same ₹5,000 debit—not ₹5,020, not ₹5,023.60 and not ₹5,000 plus “18% GST on UPI”. Step 1 — Is it P2P? If yes, MDR is ₹0. Friends, family, personal contacts and self-transfers remain free. Step 2 — Is the recipient a protected P2PM merchant? If yes, zero MDR continues while the merchant remains within the exempt classification. Step 3 — Is normal P2M amount ₹2,000 or less? If yes, MDR is ₹0 even for a large merchant. Step 4 — Is the merchant in a special category? Use the applicable special flat/capped MDR rather than blindly applying 0.4%. Step 5 — Is it a normal P2M payment above ₹2,000? Apply 0.4%; at ₹75,000 and above the MDR is capped at ₹300. Step 6 — GST? Apply 18% to the MDR/service fee under the currently stated position, then assess ITC eligibility. What about the customer? The official DFS/NPCI FAQ says UPI app providers must not levy a platform fee or other charge for UPI payments under this framework, and enterprise merchants cannot pass MDR to buyers while accepting UPI. The consumer should pay the posted price. What about UPI limits? Do not confuse transaction limits with fee thresholds. Bank/NPCI daily or category-specific limits are risk- management controls. They do not mean a user becomes chargeable after a particular number or value of UPI transactions. 3. Small merchants: the P2PM protection is more important than the ₹2,000 number The official FAQ recognises a Person-to-Person-Merchant (P2PM) category for small vendors. A small merchant receiving up to ₹1 lakh per month through UPI QR into the qualifying account can remain on mandatory zero MDR. This means a protected street vendor or small shop does not automatically become chargeable merely because one customer pays ₹3,500. MDR applicability depends on the merchant-account classification. Practical P2PM rule According to the official FAQ, acquiring banks/payment service providers monitor inward UPI credits. Merchants with inward UPI receipts above ₹1 lakh per month for three consecutive months are formally transitioned from the protected P2PM classification into P2M. GST registration is not a condition for getting the P2PM zero-MDR protection. The zero-MDR classification is based on the merchant/payment-account parameters, not on whether the shop has a GSTIN. Business control point: Merchants near the ₹1 lakh monthly UPI-receipt level should ask their acquiring bank/PSP how they are classified. Do not assume “small business for GST” automatically means “P2PM small merchant for UPI MDR”; the tests serve different laws and purposes. 4. Special UPI MDR categories Essential and thin-margin sectors The official framework provides a flat MDR for specified categories above ₹2,000. The Finance Ministry specifically identifies sectors including railways, telecommunications, insurance, fuel and agricultural inputs. The NPCI/DFS FAQ also describes specified public utility categories such as electricity, municipal water and piped natural gas as receiving a flat concessional charge. Category Stated MDR treatment Example above ₹2,000 GST on fee at 18% Railways Flat ₹5 where covered by special category ₹5 ₹0.90 Telecom Flat ₹5 where covered ₹5 ₹0.90 Insurance Flat ₹5 above ₹2,000 ₹5 ₹0.90 Fuel Flat ₹5 above ₹2,000 ₹5 ₹0.90 Agricultural inputs Flat ₹5 where covered ₹5 ₹0.90 Public utilities described in FAQ Flat ₹5 above ₹2,000 ₹5 ₹0.90 Education FAQ places education in designated industry- program treatment with flat-fee/capped structures Check merchant/acquirer category mapping Depends on actual fee charged Capital markets Payments relating to mutual funds, securities, stockbrokers and dealers fall under a separate MDR tier of 0.02% of transaction value, capped at ₹300 . The official FAQ covers UPI fund transfers for equity, debt- market investments, mutual fund purchases and broker wallet top-ups. UPI AutoPay and recurring mandates The official FAQ says automated recurring standing instructions—UPI mandates/AutoPay—do not carry the prescribed MDR transaction charge under this framework. That distinction matters for recurring utility bills, OTT subscriptions and recurring investments. A one-time capital-market payment can be under the 0.02% tier while a recurring investment executed through an eligible UPI AutoPay mandate is treated separately. RuPay credit card on UPI and credit lines These are not governed by the new direct bank-account-to-merchant 0.4% MDR rule. Credit-linked UPI transactions operate under separate credit-product rules. Businesses should therefore not assume the 0.4% rate overrides existing card/credit-line economics. Wallet/PPI on UPI Do not confuse this 2026 merchant-MDR framework with the separate PPI/wallet-on-UPI ecosystem. NPCI's UPI FAQs continue to state that the customer/PPI holder is not charged for UPI transactions, but merchant/provider-side economics for PPI transactions can follow separate arrangements. 5. GST on UPI MDR: what exactly is taxed? The biggest source of confusion is the phrase “18% GST on UPI”. That wording is misleading. Wrong: “A ₹10,000 UPI payment will attract ₹1,800 GST.” Correct: GST applies to the payment-processing/MDR service fee. If MDR is ₹40, 18% GST on that fee is ₹7.20. Normal P2M gross processing cost = MDR + 18% GST on MDR For uncapped 0.4% transactions, gross fee before ITC = transaction value × 0.004 × 1.18 = 0.472% of transaction value . Does the merchant get input tax credit? For a regular GST-registered merchant, the GST charged on the MDR/payment-processing service can generally be eligible for input tax credit where the service is used in the course or furtherance of business and the ordinary section 16 conditions are met, including possession of a valid tax invoice/document and other statutory requirements. That means GST may be a cash-flow item rather than a permanent P&L cost for an eligible regular taxpayer. The base MDR itself remains a business expense. Who may not get full ITC? Unregistered merchant: no GST credit mechanism is available; GST on MDR becomes part of the cost. Composition taxpayer: composition taxpayers are outside the regular ITC chain and cannot ordinarily claim ITC on inward supplies. Business making exempt supplies: credit attributable to exempt supplies can be restricted/reversed under GST rules, so GST on MDR may become a cost wholly or partly. Mixed taxable and exempt business: common-input-service credit may need apportionment under section 17/rules. Missing/defective invoice or other section 16 failure: ITC can be denied even though GST has been charged. • • • • • GST status as of 19 September 2026: a senior Finance Ministry official has stated that 18% GST will apply to MDR and eligible registered businesses can claim ITC. The official also acknowledged that the GST Council can address specific hardship, especially for unregistered merchants. Therefore, businesses should monitor any GST Council decision or notification before 15 October 2026 rather than hard-code the tax treatment without an update mechanism. Does GST apply to the customer's original purchase too? The customer's purchase continues to attract whatever GST applies to the underlying goods or services under normal GST law. The MDR is a separate payment-processing service supplied within the payment ecosystem. Therefore, two different tax layers can exist: GST, if any, on the goods/services sold to the customer ; and 18% GST on the MDR/payment-processing fee charged to the merchant. The second layer does not mean the entire UPI settlement value is taxed again at 18%. 6. Practical examples: exact MDR + GST impact The examples below assume the currently stated 18% GST treatment on MDR. Figures may be rounded by the bank/PSP according to invoice/settlement systems. # Scenario MDR GST on MDR Total merchant- side processing cost Customer pays extra? 1 You send ₹50,000 to your brother ₹0 ₹0 ₹0 No 2 You transfer money between your own UPI- linked bank accounts ₹0 ₹0 ₹0 No 3 Large retailer receives ₹1,999 through bank- account UPI ₹0 ₹0 ₹0 No 4 Large retailer receives exactly ₹2,000 ₹0 ₹0 ₹0 No 5 Normal P2M payment of ₹2,001 ₹8.004 ≈ ₹8.00 ₹1.44072 ≈ ₹1.44 ≈ ₹9.44 No 6 Normal P2M payment of ₹3,000 ₹12.00 ₹2.16 ₹14.16 No 7 Normal P2M payment of ₹10,000 ₹40.00 ₹7.20 ₹47.20 No 8 Normal P2M payment of ₹50,000 ₹200.00 ₹36.00 ₹236.00 No 9 Normal P2M payment of ₹74,999 ₹299.996 ≈ ₹300 ≈ ₹54 ≈ ₹354 No 1. 2. # Scenario MDR GST on MDR Total merchant- side processing cost Customer pays extra? 10 Normal P2M payment of ₹75,000 ₹300 cap ₹54 ₹354 No 11 Normal P2M payment of ₹1,00,000 ₹300 cap ₹54 ₹354 No 12 P2PM small merchant receives one ₹5,000 QR payment while still eligible ₹0 ₹0 ₹0 No 13 P2PM merchant crosses ₹1 lakh inward UPI receipts for one month only Depends on account classification; FAQ says transition is monitored over 3 consecutive months above threshold As applicable Check PSP classification No separate MDR to buyer 14 Merchant receives >₹1 lakh/month via UPI for 3 consecutive months and is transitioned to P2M 0.4% on normal P2M transactions above ₹2,000 thereafter 18% on fee Varies No 15 Fuel purchase ₹5,000 ₹5 flat ₹0.90 ₹5.90 No 16 Insurance premium ₹50,000 paid by UPI ₹5 flat ₹0.90 ₹5.90 No 17 Public utility bill ₹3,000 in covered category ₹5 flat ₹0.90 ₹5.90 No 18 One-time mutual fund / capital-market UPI payment ₹50,000 0.02% = ₹10 ₹1.80 ₹11.80 No 19 Capital-market UPI payment ₹1,00,000 0.02% = ₹20 ₹3.60 ₹23.60 No 20 Monthly ₹5,000 mutual fund SIP through qualifying UPI AutoPay mandate No prescribed MDR under FAQ ₹0 on prescribed MDR ₹0 under this MDR framework No 21 Regular GST-registered retailer receives ₹10,000 normal P2M payment ₹40 ₹7.20 Cash debit ₹47.20; eligible ITC may reduce net GST cost No 22 Unregistered retailer receives same ₹10,000 payment and is not in protected P2PM tier ₹40 ₹7.20 ₹47.20 economic cost No 23 Composition taxpayer receives same qualifying ₹10,000 payment ₹40 ₹7.20 ₹47.20; ITC ordinarily unavailable under composition No 24 Merchant dealing wholly in exempt supplies As per merchant category 18% on MDR GST credit may be restricted; tax can become cost No 25 Customer pays via RuPay credit card linked to UPI Separate credit-product rules Check credit- product terms # Scenario MDR GST on MDR Total merchant- side processing cost Customer pays extra? As per applicable fee structure Not calculated under the new direct- account 0.4% rule Why ₹2,001 can be operationally awkward The framework creates a hard MDR threshold for normal P2M transactions. A ₹2,000 transaction has zero MDR, while ₹2,001 produces roughly ₹8.00 MDR plus ₹1.44 GST. That is an operational cliff, but it does not authorise the merchant to add that amount to the customer's bill. Should a merchant split one ₹4,000 sale into two ₹2,000 UPI payments? Finin2min would not recommend structuring transactions solely to avoid MDR. The official material explains the threshold on a per-transaction basis but does not create a safe harbour for artificial splitting. Merchant- acquirer contracts, monitoring controls and future operational clarifications may address circumvention. Record the commercial sale correctly and follow the acquiring bank/PSP's implementation rules. 7. How should businesses account for MDR and GST? The accounting should preserve the gross sale value . Do not book only the amount that lands in the bank after fee deduction. Example: ₹10,000 customer payment; ₹40 MDR; ₹7.20 GST Assume the underlying sale is ₹10,000 for simplicity and the acquirer settles net of MDR plus GST. Gross receipt ₹10,000 − MDR ₹40 − GST on MDR ₹7.20 = Net bank settlement ₹9,952.80 Illustrative books for an eligible regular GST taxpayer: The input GST ledger is subject to the usual legal requirements for ITC. For an unregistered or ineligible merchant, the GST component would generally be absorbed into payment-processing expense rather than carried as recoverable ITC. Merchant reconciliation checklist Reconcile gross UPI receipts , not merely bank credits. Identify P2M, P2PM, special-category and capital-market transactions separately. Bank A/c Dr. 9,952.80 Payment Processing / MDR Expense Dr. 40.00 Input GST on MDR Dr. 7.20 To Customer / Sales Receivable A/c 10,000.00 • • Capture the acquiring bank/payment provider's GST invoice or statement showing MDR and GST. Check whether GSTIN is correctly mapped with the acquirer/PSP so the invoice supports ITC. For exempt/mixed supplies, evaluate section 17 apportionment/reversal. For composition taxpayers, do not book GST on MDR as recoverable ITC. Map net settlements to gross sales so turnover is not understated in books/GST returns/income-tax records. Build an exception report for unexpected customer-side surcharges or misclassified merchant category codes. 8. What is the real business impact? Consumers Minimal direct impact No MDR should be charged to the customer, and P2P remains free. Large retailers New acceptance cost 0.4% on qualifying transactions above ₹2,000, capped at ₹300, plus GST on the fee. GST-registered businesses GST may be creditable Eligible ITC can neutralise the GST component, but not the base MDR. Unregistered businesses GST can become cost If they fall outside protected P2PM and incur MDR, there is no ITC mechanism. Low-margin sectors Concessional treatment Specified categories receive flat/capped rates rather than standard 0.4%. Fintechs & banks Revenue sustainability MDR is intended to fund payment infrastructure, security, resilience and service. At 0.4%, a retailer with ₹20 lakh of qualifying high-ticket normal P2M receipts in a month could face up to ₹8,000 base MDR before transaction caps and category concessions. GST at 18% would be ₹1,440 on that MDR if the full amount were billed at the headline rate. For an eligible regular GST taxpayer, the ₹1,440 may be available as ITC, leaving ₹8,000 as the core processing cost. Actual results depend heavily on transaction mix, ₹75,000 caps, P2PM status and special categories. 9. Seven myths to avoid Myth 1: “All UPI payments above ₹2,000 will be charged 0.4%.” No. P2P remains free; protected P2PM merchants remain zero-MDR; special categories have different rates; AutoPay has separate treatment. • • • • • • Myth 2: “The customer must pay 0.4%.” No. MDR is merchant-side under the framework, and the official FAQ says it cannot be passed to the buyer as a separate charge. Myth 3: “18% GST will apply on the entire UPI payment.” No. The stated GST impact is 18% on MDR/payment-processing service fee. Myth 4: “₹2,000 is the new UPI transaction limit.” No. ₹2,000 is the normal P2M MDR threshold, not the UPI transfer ceiling. Myth 5: “A small merchant loses exemption if one customer pays more than ₹2,000.” Not necessarily. The official FAQ says protected P2PM status depends on merchant classification; one larger payment does not itself impose MDR on an eligible P2PM merchant. Myth 6: “Every GST-registered merchant gets 100% ITC automatically.” No.…