UPI MDR: Over 96% of transactions, small traders exempt, says NPCI
Synopsis
NPCI has firmly rebutted fears that GST on UPI's new MDR will hit small traders — pointing out that over 96% of UPI merchant transactions are below ₹2,000, attracting zero MDR and zero GST. Merchants earning up to ₹1 lakh monthly aren't liable at all, and those who do pay MDR can claim it as input tax credit.
Key Takeaways
NPCI on 22 September refuted claims that GST on UPI MDR will burden small merchants, calling such reports 'incorrect.' Over 96 per cent of UPI merchant transactions are below ₹2,000 and attract zero MDR and zero GST .
Merchants with monthly UPI receipts up to ₹1 lakh are fully exempt from MDR liability.
GST paid on MDR is eligible as input tax credit , so merchants effectively do not bear the final cost.
A flat ₹5 MDR applies to transactions above ₹2,000 in essential sectors like railways, fuel, and insurance.
Person-to-person UPI transfers remain completely free, irrespective of transaction amount.
The National Payments Corporation of India (NPCI) on Tuesday, 22 September pushed back against media reports claiming that GST on UPI Merchant Discount Rate (MDR) will burden small merchants and make digital payments more expensive, calling such apprehensions 'incorrect' and 'misplaced.' The clarification comes amid growing public concern over the new UPI fee framework.
What NPCI Actually Said
According to NPCI, MDR applies only to person-to-merchant (P2M) transactions above ₹2,000. All transactions up to ₹2,000 continue to carry zero MDR — and therefore attract zero GST impact. Government data indicates that transactions at or below this threshold constitute more than 96 per cent of total UPI merchant transaction volume, meaning the vast majority of digital payments remain completely unaffected.
Notably, merchants with monthly UPI receipts of up to ₹1 lakh are not liable to pay MDR at all, which means the question of GST on MDR does not arise for them. 'The overwhelming majority of UPI transactions and small merchants remain unaffected,' NPCI stated.
How MDR and GST Input Credit Work
NPCI and the Finance Ministry have both clarified that MDR is neither a government tax nor a charge collected by NPCI. It is distributed among payment ecosystem participants — including banks, payment service providers, and UPI application providers — to sustain and expand the UPI network.
Importantly, GST paid on MDR by a merchant will be eligible for input tax credit, meaning it can be adjusted against the GST payable on the sale of goods. In effect, merchants do not bear the final cost of GST on the MDR amount paid by them, the same way input taxes are routinely offset against output tax liability.
The New MDR Structure at a Glance
A nominal MDR of 0.4 per cent will apply only to P2M transactions above ₹2,000. For transactions of ₹75,000 and above, the MDR will be capped at ₹300 per transaction. For transactions above ₹2,000 in essential and thin-margin sectors — including railways, telecommunications, insurance, fuel, and agricultural inputs — a flat MDR of just ₹5 per transaction will apply, providing cost certainty for critical public services.
Person-to-Person Transfers Remain Free
According to an explainer issued by the Finance Ministry, the new UPI framework has no impact on any person-to-person (P2P) transactions. UPI will continue to be completely free for all P2P transfers, irrespective of the amount transferred. This directly addresses fears among individual users about paying new fees on routine transfers to family and friends.
Context and What to Watch
The MDR debate has resurfaced as India's digital payments ecosystem undergoes a structural recalibration after years of zero-fee operations. This is the first time a transaction-linked charge has been reintroduced in the UPI framework since MDR was waived in 2020, making the current rollout a closely watched policy shift. Industry stakeholders and merchant associations are expected to study the detailed guidelines before the framework comes into full effect.
Point of View
But the fact that it was needed at all reflects a communication failure at the policy rollout stage. Reintroducing MDR after a six-year waiver — even on a narrow slice of transactions — was always going to generate anxiety among small traders who built their digital payment habits on a zero-cost promise. That over 96% of transactions remain unaffected is reassuring, but the input-tax-credit offset mechanism will mean little to the unregistered micro-merchant who does not file GST returns. The real equity question — whether the bottom tier of the merchant economy is truly insulated — deserves more granular data than a blanket percentage figure.
NationPress
22 Sept 2026
Frequently Asked Questions
Will GST on UPI MDR make digital payments more expensive for small traders?
No, according to NPCI. MDR applies only to P2M transactions above ₹2,000, and over 96 per cent of UPI merchant transactions fall below that threshold, attracting zero MDR and zero GST. Merchants with monthly UPI receipts up to ₹1 lakh are not liable to pay MDR at all.
What is the new UPI MDR rate and who does it apply to?
A nominal MDR of 0.4 per cent applies only to person-to-merchant (P2M) UPI transactions above ₹2,000. For transactions of ₹75,000 and above, MDR is capped at ₹300 per transaction. Essential-sector transactions above ₹2,000 attract a flat MDR of ₹5 per transaction.
Can merchants recover the GST paid on UPI MDR?
Yes. GST paid on MDR by a merchant is eligible for input tax credit, which can be adjusted against the GST payable on the sale of goods — the same way input taxes offset output tax liability. In practice, merchants do not bear the net cost of GST on MDR.
Are person-to-person UPI transfers affected by the new MDR framework?
No. The Finance Ministry has confirmed that person-to-person (P2P) UPI transactions remain completely free, irrespective of the amount transferred. The new MDR framework applies exclusively to merchant transactions.
Which sectors get a concessional flat MDR of ₹5?
Transactions above ₹2,000 in essential and thin-margin sectors — including railways, telecommunications, insurance, fuel, and agricultural inputs — attract a flat MDR of ₹5 per transaction, providing cost certainty for critical public services and narrow-margin businesses.
