UPI GST on MDR: NPCI says over 96% transactions and small merchants remain exempt

The National Payments Corporation of India (NPCI) has rejected reports claiming that the introduction of Goods and Services Tax (GST) on UPI Merchant Discount Rate (MDR) will make digital payments more expensive for small merchants.

NPCI said the reports were misleading and clarified that MDR will apply only to person-to-merchant (P2M) UPI transactions above Rs 2,000. Transactions of up to Rs 2,000 will continue to attract zero MDR and, consequently, there will be no GST impact on such transactions.

According to government data cited by NPCI, transactions of up to Rs 2,000 account for more than 96 per cent of UPI merchant transaction volumes. This means that the vast majority of UPI payments made to merchants will continue without MDR and therefore will not attract GST on MDR.

Small merchants to remain exempt

NPCI also clarified that merchants receiving up to Rs 1 lakh through UPI every month will not be liable to pay MDR.

Therefore, small traders and merchants falling within this monthly UPI receipt threshold will not face the issue of GST being levied on MDR either.

The NPCI said concerns that GST on MDR would create an additional financial burden for small merchants were therefore misplaced, as the overwhelming majority of UPI transactions and small merchants will remain unaffected.

What is MDR?

MDR, or Merchant Discount Rate, is a fee associated with certain digital payment transactions. It is not a government tax or a charge collected by NPCI or the government.

Under the new framework, a nominal MDR of 0.4 per cent will apply to eligible P2M UPI transactions above Rs 2,000.

The MDR is distributed among different participants in the digital payments ecosystem, including banks, payment service providers and UPI application providers. The money helps support the operation and expansion of the UPI payment infrastructure.

For transactions of Rs 75,000 and above, MDR will be capped at Rs 300 per transaction.

What happens to GST on MDR?

NPCI said merchants who pay GST on MDR can adjust that GST against the GST they owe on their sales, in the same way that eligible input taxes are set off against output tax liability.

In simple terms, the GST paid on MDR can generally be claimed as an input tax credit by an eligible GST-registered merchant. Therefore, NPCI said merchants do not ultimately bear the cost of GST on the MDR amount in the same way they would if it were a non-creditable expense.

No change for person-to-person UPI payments

The new framework does not affect person-to-person (P2P) UPI transactions.

The Finance Ministry has clarified that UPI will continue to be completely free for person-to-person transfers, regardless of the amount being transferred.

For example, if one individual sends Rs 5,000 to another individual through UPI, the transaction will not attract MDR simply because the amount exceeds Rs 2,000.

The MDR provisions being discussed apply to P2M payments, where a customer pays a merchant.

Special MDR for essential and thin-margin sectors

The framework also provides a separate arrangement for certain essential and low-margin sectors.

P2M transactions above Rs 2,000 in sectors such as railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat MDR of Rs 5 per transaction instead of the standard 0.4 per cent rate.

The purpose of this flat charge is to provide greater cost certainty to businesses and services that typically operate on narrow margins.

What does this mean for ordinary UPI users?

For most people making everyday UPI payments, there is no new charge simply because they use UPI.

The key distinction is between P2P and P2M transactions:

• P2P: Person sending money to another person — remains free.
• P2M up to Rs 2,000: Zero MDR.
• P2M above Rs 2,000: 0.4 per cent MDR under the new framework, subject to the applicable exemptions and caps.
• Merchants receiving up to Rs 1 lakh per month through UPI: No MDR.
• Essential/thin-margin sectors: Rs 5 flat MDR for eligible transactions above Rs 2,000.
• Transactions of Rs 75,000 and above: MDR capped at Rs 300 per transaction.

NPCI said the provisions should therefore not be interpreted as a general charge on UPI or as a move to make UPI payments costly for ordinary users.

The clarification came after reports raised concerns that GST on MDR could increase costs for small businesses and traders. NPCI maintained that these concerns overlook the exemptions for smaller transactions and merchants, as well as the input-tax-credit mechanism available to eligible businesses.