GST on UPI Payments? Understanding MDR, 18% GST and Who Bears Cost

Summary: The proposed return of Merchant Discount Rate (MDR) on specified UPI person-to-merchant transactions from 15 October 2026 has led to widespread confusion that GST is being imposed on UPI payments themselves. The distinction is important: under the CGST Act, money is excluded from the definitions of goods and services, so merely transferring money through UPI does not itself attract GST. The article explains that the relevant taxable service arises when a bank or payment service provider charges MDR for facilitating a merchant payment, with GST applying to that processing fee rather than to the underlying purchase value. It separately examines person-to-person transfers, retail purchases up to ₹2,000, merchant transactions exceeding ₹2,000, larger commercial payments and proposed sector-specific charges. It also discusses who bears MDR and GST, availability of Input Tax Credit to eligible GST-registered merchants, the position of composition and unregistered businesses, earlier Government clarifications concerning UPI charges, and the policy balance between keeping everyday UPI payments accessible and meeting the costs of maintaining India’s digital-payment infrastructure. UPI, MDR, and GST: Separating Fact from Fear – An explainer on the UPI Merchant Discount Rate framework effective from 15th October 2026 and its treatment under GST

GST on UPI Payments and the Proposed MDR Framework

A few announcements in the recent times have created as much anxiety among India’s digital-payment users as the news that a Merchant Discount Rate is returning to certain UPI transactions from October 15, 2026. Social media has been flooded with claims that “GST is now being charged on UPI payments,” leaving millions of ordinary users worried that the ₹500 they send to a friend or the ₹5,000 they pay a shopkeeper will suddenly cost more because of a new tax. This fear, while understandable, rests on a fundamental misreading of how India’s Goods and Services Tax law actually works. The truth, once unpacked, is considerably simpler and far less alarming than the rumours suggest.

What Is Actually Changing on October 15, 2026?

What Is Actually Changing on October 15, 2026? is the first question to be answered in this direction. The National Payments Corporation of India (NPCI), which operates the UPI network across India, issued a circular introducing a new Merchant Discount Rate (MDR) framework for select person-to-merchant (P2M) transactions. From October 15, 2026, a 0.4% MDR will apply to eligible UPI merchant transactions above ₹2,000. This is not a blanket charge on every UPI payment, but it is narrowly targeted at specific categories of merchant transactions, and it does not touch person-to-person transfers at all. Crucially, NPCI itself has stated that reports suggesting GST on UPI MDR would make digital payments costlier for small businesses were incorrect, and that the impact will be limited to merchant payments above ₹2,000. This official clarification is significant as it comes directly from the body running the UPI infrastructure, and it pushes back squarely against the viral misinformation. Transactions up to ₹2,000 will continue to have zero MDR and consequently, will not attract any GST on MDR either. The Goods and Services Tax Council itself is expected to weigh in before the rollout. Government sources have indicated that the GST treatment of MDR on UPI needs to be discussed to ensure merchants do not face additional complications, and importantly, sources have underlined that the MDR itself is not a tax, cess, or surcharge, the funds collected stay within the payment ecosystem rather than going to the Government. Of the amount collected under the 0.4% MDR, roughly 40% goes to the customer’s issuing bank, 30% to the merchant’s acquiring bank, 20% to the UPI app, and 10% to the payer’s payment service provider. In other words, MDR is a fee that compensates the various players in the payment chain for the infrastructure, data security walls and risk they take on, it has nothing to do with the government’s tax revenue, except for the separate 18% GST that applies to the MDR service itself.

Why Transfer of Money Through UPI Does Not Attract GST

To understand the legal foundation why money itself cannot be taxed under GST and why the “GST on UPI” narrative is a myth, it helps to start with the statute itself. Under Section 2(52) and Section 2(102) of the Central Goods and Services Tax (CGST) Act, “money” is expressly excluded from the definitions of both “goods” and “services.” GST, by design, is a tax on the supply of goods or services and since money is neither, the simple act of transferring money from one account to another cannot attract GST as a matter of law. This means that whenever a customer sends money through UPI whether to a friend, a grocery store, a hospital, or a supplier the amount being transferred itself remains completely outside the GST net. This has always been true, even before the new MDR framework was announced, and it shall remain true after October 15, 2026 also. Nothing in the new rules changes this basic legal preposition. The taxable event, when one exists, arises only when a bank or payment service provider renders an actual service specifically, payment processing — to a merchant, and charges a fee for that service. It is this fee, not the underlying transfer of money, that falls within the scope of GST. This is in existence even now in respect of Credit card transactions where GST is charged for the commission or fees collected by the service provider / Bank.

What Exactly Is Merchant Discount Rate (MDR)?

What exactly is MDR ? The Merchant Discount Rate is a processing charge collected by a merchant’s acquiring bank (or payment aggregator) in exchange for facilitating a digital payment. Historically, as already said MDR existed on card payments and was reintroduced in various forms over the years, but it was waived entirely on UPI person-to-merchant transactions starting January 2020, when the Central Board of Direct Taxes removed the Merchant Discount Rate on P2M UPI transactions through a Gazette Notification dated December 30, 2019. That zero-MDR regime is what made UPI so attractive to small merchants and helped fuel its explosive growth over the past six years. The new framework partially reverses this, but only for a defined slice of transactions. Since MDR represents a genuine banking and payment-facilitation service, it attracts GST at the standard rate of 18%. However — and this is the crux of the entire misunderstanding — the GST is calculated only on the MDR amount, never on the value of the customer’s underlying purchase. A ₹50,000 purchase does not generate GST on ₹50,000; at most, it generates GST on the small processing fee charged to the merchant.

Breaking Down Different Categories of UPI Transactions

To see how this plays out in practice, it is useful to walk through the different types of transactions separately, Breaking Down the Categories since each is treated differently under the new framework.

(a) Person-to-Person Transfers

If an individual sends money to a friend, family member, landlord, or colleague through UPI, there is no MDR and therefore no GST — regardless of the amount. Whether it is ₹500 or ₹1 lakh, the transaction remains entirely free of these charges, because no merchant payment-processing service is involved in the first place.

(b) Small Retail Purchases up to ₹2,000

For everyday, low-value purchases, think of a customer buying groceries, food or other items, the position remains just as simple. There is no MDR and therefore no GST. The customer pays exactly the price of the goods, and the merchant receives that full amount without any deduction. This threshold is deliberately designed to protect the overwhelming majority of everyday digital payments, particularly those made by small shopkeepers, vendors, and neighbourhood stores, from any new cost.

(c) Person-to-Merchant Transactions Above ₹2,000

This is where the new framework actually bites, but even here, the burden falls on the merchant, not the customer. Suppose a customer purchases an air conditioner worth ₹50,000 and pays via UPI. The customer pays exactly ₹50,000 and nothing more. Separately, the merchant’s acquiring bank charges an MDR of 0.4%, which works out to ₹200. Because this MDR is a taxable service, 18% GST applies on that ₹200, adding ₹36 as tax element. The merchant’s total processing cost therefore becomes ₹236, but this is deducted from the merchant’s settlement, not added to what the customer pays.

(d) Large Commercial Payments

For bigger-ticket business transactions, the MDR is capped rather than allowed to scale indefinitely. Merchant payments above ₹2,000 attract an MDR of 0.4%, subject to an overall cap of ₹300. So if a business customer makes a UPI payment of ₹1,00,000, the MDR is capped at ₹300 rather than the uncapped 0.4% figure (which would have been ₹400). GST at 18% on ₹300 amounts to ₹54, meaning the merchant bears a total charge of ₹354, again, entirely separate from the ₹1,00,000 the payer actually transfers.

(e) Sector-Specific Flat MDR

Certain categories like fuel purchases, railway ticket bookings, mobile recharges, and insurance premium payments, are proposed to attract a flat MDR of ₹5 regardless of transaction size. If a customer fills petrol worth ₹3,000 using UPI, the customer still pays only ₹3,000. The fuel station absorbs the flat ₹5 MDR, and GST at 18% on that ₹5 adds roughly 90 paise, bringing the merchant’s total charge to about ₹5.90.

Who Actually Bears MDR and GST Cost?

The question that is perhaps the single most important point buried under the noise is “Who actually bears this cost?”. Legally and operationally, MDR is charged to the merchant, not the customer. The GST associated with that MDR is also payable on the service received by the merchant not by the person making the payment. The Government and the Indian Banks’ Association are working on a mechanism specifically to ensure that UPI MDR is not passed on to consumers and government guidelines are expected to prohibit merchants from separately recovering these processing charges from customers through surcharges or hidden fees. The explicit policy intention is that consumers continue to experience seamless, predictable digital payments without hidden add-ons at the checkout counter. This is why sources consistently describe UPI-MDR as a merchant-side payment ecosystem charge, one that customers do not pay directly. It affects a merchant’s settlement, margins, and reconciliation particularly for businesses that process a high volume of eligible UPI payments, but it should not, if the rules are followed as designed, ever show up as an extra line item on a customer’s receipt.

Input Tax Credit of GST Paid on MDR

A second major point of confusion concerns Input Tax Credit (ITC). Many small business owners have worried that the 18% GST charged on MDR represents a pure additional cost eating into their margins. However, for most regular, GST-registered businesses, this fear is largely unfounded. As payment-processing services are used in the ordinary course of business, the GST paid on MDR generally qualifies as Input Tax Credit, subject to the usual conditions, including proper documentation and reflection in the business’s GSTR-2B statement. The merchants can adjust the GST charged on MDR against their output GST liability. This means a GST-registered merchant can set off the GST paid on MDR against the GST it collects on its own supplies, effectively neutralising the tax component of the charge. For such businesses, MDR itself may represent a genuine transaction cost (since the 0.4% fee is real money leaving their settlement), but the GST layered on top of it is largely recoverable rather than a sunk cost.

Impact on Composition Taxpayers and Unregistered Businesses

The picture is different, however, for two categories of businesses i.e., those that are unregistered under GST and those operating under the composition levy scheme. Composition taxpayers and unregistered businesses cannot claim Input Tax Credit, which means that for them, both the MDR itself and the GST charged on it become a genuine, unrecoverable operating expense. Small traders and shopkeepers who fall under the composition scheme, a category specifically designed to simplify compliance for smaller businesses, will therefore feel the pinch of this new charge more directly than larger ones i.e., a fully GST-registered enterprises that can claim the credit back.

Five Points to Understand GST and MDR on UPI

As a Simple framework to remember, the entire arrangement can be reduced to five straightforward propositions:

• The customer pays only the purchase value — nothing more, nothing less.
• The merchant pays the MDR out of the amount it receives in settlement.
• The merchant also bears the GST levied on that MDR.
• If the merchant is a regular GST registrant, that GST can usually be claimed back as Input Tax Credit, softening the real-world impact.
• If the merchant is unregistered or under the composition scheme, the GST on MDR becomes a final, absorbed cost.

Why GST on UPI Misinformation Spread So Quickly

It is worth pausing to ask why this myth & misinformation spread so quickly and took hold so forcefully in the first place. Part of the answer lies in the sheer scale and familiarity of UPI usage in Indian life, UPI completed ten years of operation in August 2026 and processed transactions worth ₹314 trillion in FY 2025-26, a more than 4,000-fold increase in transaction value since its inception. Given how deeply UPI is woven into daily life, right from using a Sulabh Toilet to buying expensive gadget, any hint of a new charge naturally triggers alarm among hundreds of millions of users, and headlines announcing “GST on UPI” travel much faster than the nuanced clarification that follows. This is not the first time such rumours have circulated either. In June 2025, the Finance Ministry had to publicly state that claims about MDR being charged on UPI transactions were completely false, baseless, and misleading, warning that such speculation causes needless uncertainty and fear among citizens. As recently as April 2026, the Ministry of Finance again clarified that claims about GST being levied on UPI transactions over ₹2,000 were false and misleading, reiterating that GST applies only to charges like MDR relating to certain payment instruments, and that since no MDR was being charged on UPI at that time, no GST was applicable either. The current round of confusion, triggered by the genuine reintroduction of MDR in 2026, is in some sense a continuation of this recurring pattern of public anxiety around digital payment costs. What has changed this time is that MDR is genuinely returning, a real policy shift rather than a rumour, which is precisely why the accompanying GST question has become live and legitimate to ask, even though the underlying legal position (GST applies to the fee, not the transfer) has not changed at all.

Balancing UPI Sustainability With Accessibility

It’s also worth understanding the bigger picture of balancing sustainability with accessibility, why this change is happening at all. UPI’s zero-MDR model, while wildly successful in driving adoption, has long been criticized by banks and payment service providers as economically unsustainable, as they bear the cost of building and maintaining payment infrastructure with zero tolerance on data compromise, without earning a corresponding fee on P2M transactions. The reintroduction of a 0.4% MDR on eligible transactions above ₹2,000 is being framed by NPCI as supporting the long-term sustainability of the digital payments ecosystem. At the same time, Government has been extremely careful to structure the change cautiously so that it does not undermine UPI’s core value proposition i.e., free, frictionless payments for the vast majority of everyday transactions. NPCI has emphasized that 96% of UPI transactions will remain entirely unaffected by this change, since most day-to-day payments fall below the ₹2,000 threshold or fall into person-to-person transfers that were never in scope to begin with. This targeted design of protecting small, frequent, low-value transactions while introducing a modest fee on larger merchant payments, reflects an attempt to strike a balance between the financial sustainability of the payments ecosystem and continued affordability for ordinary users and small businesses.

Final Rules and GST Council Clarification Awaited

It should be noted that some elements of this framework are still being finalized. The GST Council’s recommendations with the Council’s meeting on October 7 being a possible venue for further clarification before the scheduled roll out of the changes on 15^th October 2026. . Businesses and merchants would be well advised to watch for the final notified rules rather than relying solely social media reports.

Before bidding adieu…….

The controversy around “GST on UPI” is at its root, a case of an accurate but narrow technical change being misread as a sweeping new tax on everyday digital payments. The legal reality is unambiguous i.e., money is not goods or services under GST law, and the transfer of money through UPI , whether ₹500 between friends or ₹5 lakh for a business deal remains entirely outside the GST net, exactly as it always has been. What is genuinely changing is that from October 15, 2026, banks will once again charge merchants a Merchant Discount Rate on certain P2M transactions exceeding ₹2,000, and that MDR being a real supply of service attracts 18% GST, calculated only on the (typically small) fee itself. Customers will continue to pay exactly the advertised price for their purchases. Merchants will bear the MDR and the associated GST, though GST-registered businesses can generally offset that GST through Input Tax Credit, while unregistered and composition-scheme businesses will feel it as a genuine, if modest, additional cost. For the ordinary UPI user sending money to family, paying the neighbourhood grocer, or splitting a bill with friends nothing changes. The myth that “GST is being imposed on UPI payments” conflates two entirely different things: one the tax-free transfer of money, and two a narrowly targeted service fee charged to certain merchants. Understanding that distinction is the key to seeing through the confusion and recognizing the change for what it actually is. There is nothing to fear as the facts are clear. Jai Hind !!!!!!!