From 15 October 2026, some UPI payments made to businesses will carry a Merchant Discount Rate (MDR). If you pay by UPI as a customer, nothing changes for you. If you run a business that collects large-ticket payments through UPI, your bank will now keep a small part of those receipts.
A lot of what is circulating on WhatsApp about "UPI tax" and "charges on UPI" is wrong. Here is what the Ministry of Finance has actually said, based only on its official statements and FAQs.
What is MDR?
MDR is the fee a business pays to its bank and the payment system for accepting a digital payment. It is the same idea as the charge a shop pays when a customer swipes a card. It is paid by the merchant, not the customer.
Why UPI was free until now
Since January 2020, banks and payment system providers have been barred from charging MDR on UPI. This was done through section 10A of the Payment and Settlement Systems Act, 2007, read with section 269SU of the Income-tax Act, 1961, to push digital payments.
The industry still had costs, so the Government paid banks an annual incentive instead. For example, the scheme for FY 2024-25 had an outlay of ₹1,500 crore and paid 0.15% on low-value BHIM-UPI payments up to ₹2,000 made to small merchants.
The Department of Financial Services now says these incentives "were designed as short-term bridge funding rather than a permanent measure to compensate the cost incurred by the payment industry."
What changed in the law
The Taxation and Other Laws (Amendment) Bill, 2026 (Bill No. 150 of 2026) amended section 10A of the PSS Act. The zero-charge rule no longer depends on the old Income-tax Act provision. It now applies to "one or more electronic modes of payment as the Central Government may, by notification, specify."
In simple terms, the Government can now decide which payments stay free, rather than keeping every UPI payment free by law.
On 8 August 2026, the Ministry of Finance called this "an enabling provision designed to ensure UPI's long-term sustainability, technological advancement, and resilience against emerging risks," and said the MDR itself would be decided by the UPI Steering Committee.
The new UPI MDR rates
| Type of UPI payment | MDR from 15 Oct 2026 |
|---|---|
| Person-to-person (sending money to family, friends) | Nil, any amount |
| Payment to a merchant of ₹2,000 or less | Nil |
| Small merchants receiving up to ₹1 lakh a month through UPI QR | Nil, even on payments above ₹2,000 |
| Payment to a merchant above ₹2,000 | 0.4% |
| Payment of ₹75,000 and above | 0.4%, capped at ₹300 per transaction |
| Specified categories such as railways, telecom, insurance and fuel | Flat ₹5 per transaction |
| Capital market payments | 0.02%, capped at ₹300 |
The Ministry says the MDR will apply to only about 4% of merchant transactions, and "96% of merchant transactions will remain unaffected."
How it works in practice
Who pays: the merchant. The FAQs are clear that "merchants on-boarded cannot pass on MDR charges to customers while accepting payments through UPI." So a shop cannot add a "UPI surcharge" on the bill.
Who collects it: the merchant's bank or payment provider. The Ministry says the MDR "is distributed only amongst the UPI ecosystem" (banks and payment apps) to fund infrastructure, cybersecurity, fraud detection and customer service. According to the 15 September 2026 release, 5% of total MDR collections will go towards promoting UPI among small merchants.
How it will show up: the official FAQs do not say exactly how banks will deduct it, for example netted from each settlement or billed monthly. That will depend on your bank's or payment aggregator's terms. Ask your bank now so the first statement after 15 October is not a surprise.
Small merchants (P2PM): a street vendor or small shop receiving up to ₹1 lakh a month through UPI QR stays at zero MDR. No new QR code or GST registration is needed for this. If UPI receipts go above ₹1 lakh a month for 3 consecutive months, the bank moves the account to the regular merchant (P2M) category, and MDR then applies to payments above ₹2,000.
A quick example
Suppose a furniture showroom receives these UPI payments in one day:
| Payment | MDR |
|---|---|
| ₹1,800 | Nil (₹2,000 or less) |
| ₹12,000 | ₹48 (0.4%) |
| ₹90,000 | ₹300 (0.4% is ₹360, but capped at ₹300) |
The customer pays ₹1,800, ₹12,000 and ₹90,000, exactly as billed. The showroom bears ₹348 in MDR.
What businesses should do now
- Check your category. Ask your bank whether your UPI account is treated as small merchant (P2PM) or regular merchant (P2M).
- Watch the ₹1 lakh line. If you are a small merchant close to ₹1 lakh a month, remember the 3-consecutive-month rule.
- Don't add a UPI surcharge. It is not allowed.
- Update your pricing and costing for high-value UPI sales, especially on thin margins.
- Book MDR properly. Record MDR as bank or payment charges in your books, and reconcile UPI settlements against sales. Our accounting and bookkeeping team can help set this up.
- GST on the charge: the official FAQs do not address this. Check how your bank shows GST on its invoice or statement and whether you can claim input tax credit. See our GST page or speak to your adviser.
Frequently asked questions
Will I be charged for paying by UPI?
No. The Ministry of Finance has stated that consumers making payments will not face any transaction charges, and person-to-person transfers remain free.
From when does UPI MDR apply?
From 15 October 2026, on merchant (P2M) payments above ₹2,000, as per the Department of Financial Services FAQs dated 15 September 2026.
Is there any GST on UPI payments?
No GST is charged to customers on making a UPI payment. The Ministry of Finance has earlier called claims of GST on UPI transactions above ₹2,000 "completely false".
Can a shopkeeper ask me to pay extra for UPI?
No. Merchants cannot pass on the MDR to customers.
Sources: Ministry of Finance press release, 15 September 2026 (PIB); Department of Financial Services FAQs on MDR on select UPI (P2M) transactions; Ministry of Finance press release "No Charges for UPI Users", 8 August 2026 (PIB); The Taxation and Other Laws (Amendment) Bill, 2026 (Sansad); Cabinet approval of incentive scheme for low-value BHIM-UPI transactions, 19 March 2025 (PIB); PIB on GST on UPI claims. This article is for general information only and is not professional advice. Please refer to the official documents or consult us for advice on your specific case.
For more details on this topic, or to discuss how it affects you, please get in touch with our team.
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