UPI MDR above ₹2000 to attract 18% GST from october 15: What merchants need to know

India's Unified Payments Interface (UPI) is set for a major change from October 15, 2026, with the introduction of a 0.4% Merchant Discount Rate (MDR) on specified person to merchant (P2M) transactions above ₹2,000. The MDR itself will attract 18% Goods and Services Tax (GST), increasing the effective charge for merchants to 0.472% of the transaction value, subject to the applicable MDR cap.

The important tax point for businesses is that GST will not be charged on the entire UPI payment. Instead, the 18% GST will apply only to the MDR or payment processing service fee. Eligible GST registered businesses can claim Input Tax Credit (ITC) on this GST, provided the normal conditions for claiming ITC are satisfied.

What is changing for UPI payments above ₹2,000?

Under the new framework announced by the NPCI, eligible P2M UPI transactions exceeding ₹2,000 will carry an MDR of 0.4%, with the MDR capped at ₹300 per transaction. At 0.4%, the ₹300 ceiling is reached at a transaction value of ₹75,000. The charge will be borne by the merchant rather than the customer. UPI payments between individuals will continue to remain outside this MDR framework, while transactions within the applicable low value categories will also remain free of MDR. Certain specified categories will receive a concessional MDR structure. For transactions above ₹2,000 in categories such as railways, telecom services, insurance and fuel, a flat MDR of ₹5 will apply under the framework.

How does the 18% GST work?

MDR is essentially a charge for payment processing and settlement services. Since that service is taxable, the applicable GST is calculated on the MDR amount, not on the underlying amount paid by the customer. For example, suppose a customer pays ₹10,000 to a merchant through an applicable UPI transaction. UPI transaction value: ₹10,000 MDR at 0.4%: ₹40 GST at 18% on ₹40: ₹7.20 Total MDR plus GST: ₹47.20. Therefore, the merchant's gross payment processing cost would be ₹47.20, equivalent to 0.472% of the ₹10,000 transaction.

The distinction is important because the 18% GST headline does not mean that 18% GST will be imposed on the ₹10,000 UPI payment. The tax applies to the ₹40 service charge. Tax experts quoted by The Economic Times and Business Standard have also stressed that the GST applies to the payment service fee rather than the underlying UPI transaction.

Can merchants Claim Input Tax Credit?

Yes, eligible GST registered merchants can generally Claim ITC on the GST charged on MDR, subject to the normal GST requirements. This means the additional GST may not ultimately become a permanent tax cost for a business that is registered under GST; receives the required tax documentation for the payment processing service; uses the service for business purposes and has taxable outward supplies against which the credit can be utilised.

In practical terms, the MDR and GST may initially be charged to the merchant, but an eligible business can potentially recover the GST component through the input tax credit mechanism.

- ITC benefit will not be the same for every merchant

- The ITC provision does not mean that every merchant will automatically recover the GST.

- The actual tax impact will depend on the merchant's GST status and the nature of its business.

For example, a GST registered business making taxable supplies may generally be able to utilise eligible ITC. On the other hand, businesses whose outward supplies are exempt may not be able to utilise the GST paid on MDR in the same manner and could therefore bear the tax as a real cost.

This distinction makes the new framework particularly relevant for businesses that operate across taxable and exempt supplies.

How much will merchants actually pay?

The effect can be illustrated as follows:

*The ₹300 MDR cap applies at ₹75,000 and above under the stated framework. GST is calculated on the capped MDR.

For an eligible GST registered merchant able to fully utilise the ITC, the ₹7.20 GST in the ₹10,000 example could be claimed as input tax credit, leaving the underlying ₹40 MDR as the effective payment processing cost, subject to GST rules and documentation.

Why the change matters?

The introduction of MDR represents a shift in the economics of India's UPI ecosystem. UPI has operated for years with  consumers generally not paying transaction charges, while the government has supported the ecosystem through various incentives. The new framework introduces a revenue stream from selected higher value merchant transactions while attempting to keep smaller transactions outside the MDR regime. The proportion of higher value P2M transactions has also been rising. According to figures cited by PTI, the share of P2M UPI transactions above ₹2,000 increased from 15.1% in FY23 to 20.1% in the June quarter of FY27. The change therefore comes as UPI increasingly handles larger value purchases rather than being used only for small everyday payments. 

GST revenue could run into thousands of crores- The new MDR structure could also create a sizeable GST revenue stream for the government. Tax experts have produced different estimates because the final revenue will depend on transaction volumes, exemptions, concessional MDR categories, the ₹300 cap and the extent to which merchants qualify for ITC.

Customers will not be directly charged the MDR- One of the most important aspects of the new system is that the MDR is a merchant-side charge. Customers making applicable UPI payments will not see a separate 0.4% fee added to their bill merely because the payment exceeds ₹2,000. The fee is charged to the merchant within the payment processing chain. This means a customer paying ₹10,000 through UPI does not suddenly pay ₹10,040 or ₹10,047.20 merely because of the MDR. The merchant bears the applicable processing charge.

Small merchants remain an important exception- NPCI's framework also provides protection for smaller merchants. Reporting on the framework says merchants falling under the P2PM category, typically small merchants receiving relatively low monthly UPI collections, will continue to enjoy mandatory zero MDR. One reported threshold for this category is monthly UPI receipts below ₹1 lakh.

This is significant because the new MDR is aimed primarily at higher value merchant transactions rather than imposing a universal fee across India's vast network of small UPI merchants.

What merchants should do before October 15?

Businesses accepting UPI payments should review their payment processing arrangements before the new framework takes effect.

In particular, GST registered merchants should ensure that their bank or payment service provider provides appropriate GST documentation for MDR and related charges. Proper invoices or statements will be important for supporting an ITC claim.

Businesses should also determine:

1. Which UPI transactions fall under the 0.4% MDR.
2. Whether any of their transactions qualify for the ₹5 concessional MDR.
3. Whether they fall within the small merchant zero-MDR category.
4. How the ₹300 transaction level cap affects their larger payments.
5. Whether they are eligible to claim ITC on the GST charged on MDR.
6. Whether their accounting and GST systems are configured to capture the new charges correctly.

-Bottom line-

The new UPI MDR framework does not mean that UPI payments above ₹2,000 will attract 18% GST on the payment amount. The structure is more specific: qualifying merchant transactions above ₹2,000 will attract a 0.4% MDR, and 18% GST will be charged on that MDR.

For a ₹10,000 transaction, for example the MDR is ₹40 and the GST on it is ₹7.20, making the total charge ₹47.20. A GST registered merchant making taxable supplies may generally be able to claim the ₹7.20 as ITC, subject to the applicable GST conditions. The result is therefore likely to differ significantly from one merchant to another. Businesses with usable ITC may see the GST component largely neutralised, while merchants that cannot claim or utilise ITC may bear it as an additional cost. The new rules will take effect on October 15, 2026, marking a significant change in the commercial model underlying India's UPI ecosystem.