Your shop's UPI payments now cost money. Here's who pays

What is MDR?

MDR stands for merchant discount rate, the fee a shop pays its bank for processing each UPI payment. From October 15, 2026, it is 0.4% on payments above Rs 2,000, capped at Rs 300 over Rs 75,000. The merchant's bank bills the full fee and splits it: 40% to the customer's bank, 30% it keeps, 20% to the app, 10% to the app's sponsor bank. Customers never pay it.

Can shops raise prices to cover this fee?

No. The merchant bears the 0.4% fee on UPI payments above ₹2,000 and is not permitted to pass it on to you separately. Small merchants receiving up to ₹1 lakh a month via UPI QR codes stay exempt. The customer's price remains unchanged.

Why does an old credit card ruling matter here?

That old ruling, Commissioner of GST & Central Excise v. Citibank N.A., said credit card MDR was one unified service, so taxing the issuing bank's share again would mean double taxation. It's a guide for UPI, but GST law has no matching provision, so it can't simply be copied. Each case must be examined afresh.

Why did UPI stay free for so long?

Zero MDR was a government policy, not a market outcome. Since January 2020, RuPay (India's domestic card network) and BHIM-UPI (the instant payment system) merchant payments carried no fee, so banks and apps earned nothing from them. To keep the system running, the government paid incentives: ₹3,500 crore for FY 2023-24, then ₹1,500 crore for FY 2024-25. Those subsidies only covered small transactions up to ₹2,000, the model the new fee replaces.

Why is the GST on this fee still unclear?

The GST rate on the fee is expected to be 18%, but the base is unsettled: on a Rs 40 fee, 18% could mean Rs 7.20 or just Rs 2.16 if only the merchant's bank's Rs 12 share is taxed. The answer hinges on whether the MDR (the merchant discount rate, the fee banks charge merchants) is one combined service or several separate ones, a question the old Supreme Court ruled on for credit cards but GST law has not yet settled.

Who keeps the 0.4% that merchants pay?

The 0.4% fee does not go to one company. It is split four ways: the customer's bank keeps 40%, the merchant's own bank keeps 30%, the UPI app (like Google Pay or PhonePe) keeps 20%, and the app's sponsor bank keeps 10%. The merchant's bank collects the full fee and passes the rest along.

How does a merchant claim credit for tax he paid?

A GST-registered merchant claims input tax credit by holding a valid tax invoice for the MDR paid and meeting conditions under Section 16 of the CGST Act (the central goods and services tax law), which also requires the tax to have been paid to the government. However, the bank must first issue that invoice, and the exact amount is yet unclear.