UPI Merchant Discount Rate from 15 October 2026: Where GST Applies and When ITC Is Available

From 15 October 2026, a Merchant Discount Rate (MDR) applies to specified person-to-merchant UPI payments above ₹2,000. The charge falls on the merchant, not on the customer, and GST at 18% is levied on the MDR, not on the amount paid through UPI. What follows sets out the charges, how GST applies to them, where input tax credit is and is not available, and what businesses receiving UPI payments should settle before the date.

What has changed

UPI payments to merchants have carried no MDR since January 2020, when the fee was done away with to encourage digital payments. Banks and payment apps have since been compensated through a budget-funded incentive scheme. According to one report, the National Payments Corporation of India (NPCI) issued a circular on 15 September 2026 reintroducing MDR on certain UPI payments with effect from 15 October 2026.

NPCI’s figures, as reported, put the payments attracting MDR at about 4% of merchant UPI transactions, but roughly two-thirds of the value of merchant payments. The Finance Ministry has stated that MDR is not a tax, cess or surcharge collected by the Government. It is a payment-processing charge shared among the banks, payment service providers and UPI apps in the chain.

The charges

Two details differ between published accounts and should be confirmed against the NPCI circular and the acquiring bank’s communication. The small-merchant exclusion is described both as collections “below ₹1 lakh” and “up to ₹1 lakh” a month. The flat-fee list in one account also includes agricultural inputs.

GST applies to the MDR, not to the payment

MDR is consideration for a service supplied by the bank or payment service provider to the merchant, and it attracts GST at 18%. The GST is computed on the MDR alone. NPCI has clarified that on a ₹10,000 payment subject to 0.4% MDR, the MDR is ₹40 and GST is charged on that ₹40, not on the ₹10,000.

On the published illustrations:

• a ₹40,000 purchase carries MDR of ₹160 and GST of ₹28.80
• a ₹1,00,000 payment reaches the cap, with MDR of ₹300 and GST of ₹54
• a ₹3,000 fuel payment carries the flat ₹5, plus 90 paise GST
• an ₹800 payment carries neither

At the 0.4% rate, MDR and GST together come to 0.472% of the payment.

The MDR base includes the merchant’s own output tax

MDR is charged on the whole amount the customer pays, and for a registered merchant that amount includes the output GST on the sale. The percentage cost is therefore higher when measured against the pre-GST price, which is how most businesses price and cost their goods.

Take goods priced at ₹10,000 with GST at 18%. The customer pays ₹11,800. MDR at 0.4% is ₹47.20, and GST on it is ₹8.50, a total of ₹55.70. Against the pre-GST price of ₹10,000, that is 0.557%. A registered merchant who takes credit of the ₹8.50 bears ₹47.20, which is still 0.472% of the pre-GST price rather than the headline 0.4%.

Input tax credit on the GST charged on MDR

For a regular registered taxpayer, GST paid on MDR is available as input tax credit, subject to the usual conditions, in the same way as GST on a telephone bill or on office rent. Credit depends on the bank’s or payment provider’s invoice carrying the merchant’s GSTIN and reflecting in GSTR-2B. A business that has not updated its GSTIN with its bank and payment provider risks invoices that cannot support a claim.

Composition taxpayers cannot take input tax credit at all, and unregistered businesses have no mechanism to do so. For both, GST on MDR is a cost.

The unregistered merchants who actually bear it fall in a narrower band than the headlines suggest. Merchants whose monthly person-to-merchant collections stay within ₹1 lakh, about ₹12 lakh a year, pay no MDR at all, and so no GST on it. Registration becomes mandatory, generally, at ₹20 lakh turnover for suppliers of services and ₹40 lakh for suppliers of goods, subject to conditions and exceptions. The exposure therefore sits with merchants whose UPI collections exceed ₹1 lakh a month but whose turnover remains below the threshold.

For them, the question raised is whether voluntary registration is worth taking only to recover this GST. The amount at stake is modest. On ₹2 lakh a month of UPI receipts, all in payments above ₹2,000 at the 0.4% rate, MDR is ₹800 and GST on it is ₹144 a month. That ₹144 has to be weighed against the cost of monthly returns, records and the other obligations that registration brings.

The MDR cannot be added to the customer’s bill

The Finance Ministry has stated that MDR is a cost within the merchant payment system and is not to be collected from customers. Banks have been advised to ensure that merchants do not pass it on, and UPI apps are not permitted to add any hidden platform fee. The Ministry is working with the Indian Banks’ Association on a mechanism to keep MDR off customers’ bills, and is expected to engage with trader organisations.

A separate “UPI charge” added to an invoice is therefore not an option, and a customer may refuse it and complain through the UPI app or the merchant’s bank. The Confederation of All India Traders has raised concerns about the added cost and urged that the implementation timeline be reconsidered. The 15 October date should be treated as firm unless NPCI or the Government announces otherwise.

The cost against cards

On the published comparison, UPI remains the cheapest way for a business to receive a digital payment even with the new charge. On a ₹50,000 sale, it puts the merchant’s cost at ₹750 to ₹1,250 on a credit card and up to ₹450 on a debit card, against ₹200 on UPI.

Before 15 October

• GSTIN with the bank and payment provider. Registered businesses should confirm it is updated, so that MDR invoices carry it and reach GSTR-2B.
• Monthly reconciliation. GSTR-2B should be checked for the MDR invoices from October onwards, so the credit is not lost.
• The ₹1 lakh boundary. Merchants close to ₹1 lakh a month in UPI collections should confirm with their bank which side of the exclusion they fall on.
• The flat ₹5 category. Businesses in fuel, railways, telecom, insurance and, possibly, agricultural inputs should confirm that it applies to their payments.
• Billing. Any “UPI charge” line on invoices or at the counter should be removed.
• Costing. Composition taxpayers and unregistered businesses above the ₹1 lakh level should treat MDR and the GST on it as a cost of collection, at about 0.47% of affected receipts.

This article is intended for educational purposes only and should not be construed as professional advice. It is based on the law as understood on the date of publication; laws and regulations are subject to change, and it may not reflect later developments. Readers are advised to consult a qualified tax professional on their specific situation before taking any action based on it. CA. Mohit Gaba takes no responsibility for any action taken or decision made on the basis of this article.