UPI payments above ₹2,000 will attract a Merchant Discount Rate (MDR) from October 15, 2026, and an 18% GST will apply to the MDR charged on eligible transactions.
The GST will not be levied on the full UPI payment amount.
The new framework does not mean customers will directly pay 18% GST on their UPI bills.
The charge applies to the MDR paid by eligible merchants, while the government has said UPI payments to merchants up to ₹2,000 will continue to remain free of MDR.
UPI Payments Over ₹2,000: How GST Applie
Under the new framework, eligible person-to-merchant UPI transactions above ₹2,000 will attract an MDR of 0.4%, subject to a maximum of ₹300 per transaction.
The MDR is deducted from the merchant’s settlement amount.
For example, if a customer makes a ₹10,000 eligible UPI payment, the MDR at 0.4% would be ₹40.
The 18% GST would then be calculated on that ₹40 MDR, adding ₹7.20 to the merchant-side payment cost.
The customer would still pay ₹10,000 for the purchase, rather than ₹10,007.20.
The government has also said banks and payment aggregators will be monitored to prevent the MDR cost from being passed on to consumers.
Which UPI Transactions Will Remain Free
Person-to-person UPI transfers will continue to remain completely free, irrespective of the amount transferred. Merchant payments up to ₹2,000 will also remain outside the MDR framework.
The government has said payments received by qualifying small merchants will continue to have zero MDR under the applicable rules.
According to the Finance Ministry, around 96% of person-to-merchant UPI transactions will remain unaffected by the new framework.
This means the new MDR arrangement will apply only to specified merchant transactions above the applicable threshold, rather than to every UPI payment.
Special MDR Rates for Some Categories
Certain categories, including fuel, railways, telecommunications, insurance and agricultural inputs, will have a flat ₹5 MDR for eligible transactions above ₹2,000, according to the reported framework.
For such a ₹5 MDR, the 18% GST would amount to 90 paise.
The combined MDR and GST would therefore be ₹5.90 on the merchant side.
The change has already drawn attention from some businesses. Petrol pump dealers in Madhya Pradesh, for example, have announced that they will stop accepting UPI payments above ₹2,000 from October 16, citing the additional payment-related cost.
Can Merchants Claim GST Input Tax Credit?
GST-registered businesses can generally claim the GST paid on MDR as input tax credit, subject to the conditions under GST rules.
This can reduce the effective tax cost for eligible businesses.
However, businesses that are not eligible to claim input tax credit may not receive the same benefit.
The actual financial impact will therefore differ depending on the merchant’s GST registration and eligibility.
The government has clarified that the 18% GST is not a tax on the underlying UPI transaction.
It is applied to the MDR or processing fee charged on eligible transactions.
For consumers, UPI payments remain free under the specified conditions, while merchants will need to account for the new MDR and applicable GST from October 15.
