Government Mulls Mechanism to Prevent Merchants from Passing UPI MDR Charges to Customers

The government is looking at a mechanism to check whether merchants pass Merchant Discount Rate (MDR) charges on to customers, as per a Business Standard news report.  

The issue has come up ahead of the new MDR rules for some UPI payments from October 15, 2026. A finance ministry official noted that merchants will be monitored for this.  

The government has not yet said what form the monitoring will take. There is also no existing legal framework specifically covering the passing on of MDR to customers. 

Which UPI Payments Will Carry MDR? 

From October 15, 2026, an MDR of 0.4% will apply to UPI person-to-merchant (P2M) transactions above ₹2,000 at specified merchants. For transactions of ₹75,000 or more, the MDR will be capped at ₹300. 

P2M transactions of up to ₹2,000 will continue without MDR. Person-to-person (P2P) payments, such as money transfers between family members and friends, will also remain free of MDR. 

Exemption for Small Merchants 

Small merchants processing up to ₹1 lakh a month through UPI will not have to pay MDR. The government expects these exemptions and transaction limits to keep a large part of merchant payments outside the new charge. 

The question of passing the cost to customers arose after the MDR announcement. Merchants may have to pay banks for eligible UPI transactions, leading to concerns that some could try to recover the expense through higher prices. 

18% GST on MDR 

As per the report, MDR will also attract 18% Goods & Services Tax (GST). GST-registered businesses will be able to claim input tax credit (ITC) on the GST paid on MDR. 

The GST Council may examine the issue if required. The official said it could be considered at the Council's October 7 meeting, although there is no confirmation that it will be on the agenda. 

Read More: Know the Merchant Discount Rate on UPI Transactions Above ₹2,000! 

Conclusion 

The government expects a substantial share of merchant transactions to remain MDR-free. Details of the proposed monitoring system, including how merchants would be checked, are yet to be announced. 

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