UPI MDR on Select Merchant Transactions Deferred Until After Diwali: What Businesses Must Know

By CA Sandeep Kanoi Finance Articles October 13, 2026

Summary: The National Payments Corporation of India (NPCI) announced on 13 October 2026 that the UPI and Services Steering Committee had decided to implement Merchant Discount Rate (MDR) on select person-to-merchant (P2M) UPI transactions only after Diwali. The precise commencement date will be notified separately. This is a postponement of the proposed commencement, not a cancellation of the merchant-pricing framework. Merchants should therefore avoid treating the announcement as a permanent exemption or as permission to impose a new charge on consumers immediately.

What Is MDR and Who Pays It?
Which UPI Transactions Are Proposed to Be Covered?
Proposed Rate and Illustrative Cost
Why the Implementation Was Deferred
Impact on Small Traders and Larger Retailers
GST and Accounting Considerations
Customer Pricing and Compliance Risks
Practical Checklist Before the New Date
Conclusion
Further Reading and Official References

What Is MDR and Who Pays It?

Merchant Discount Rate is the fee associated with accepting and processing a qualifying electronic merchant payment. It is conceptually distinct from income tax, GST on the underlying sale and a charge collected by NPCI or the Government. Under the announced framework, the fee is intended to compensate participants in the payments ecosystem, including banks and payment service providers. Whether a merchant bears the cost economically depends on the applicable scheme, contract and pricing arrangement. It is important to distinguish a merchant paying a processing fee from a customer being charged merely for using UPI.

Which UPI Transactions Are Proposed to Be Covered?

The Government clarified on 15 September 2026 that person-to-person UPI transfers would remain free irrespective of amount. Merchant payments of up to Rs. 2,000 and transactions covered by the zero-MDR framework for small merchants would also remain free. The clarification estimated that approximately 96% of person-to-merchant transactions would be unaffected. Consequently, the new measure should not be described as a blanket fee on every UPI payment above Rs. 2,000. The merchant category, exemption conditions and other scheme rules are material.

Proposed Rate and Illustrative Cost

Contemporaneous reporting describes a proposed standard MDR of 0.4% on eligible merchant payments exceeding Rs. 2,000, subject to a Rs. 300 cap per transaction. At that standard rate, an eligible payment of Rs. 3,000 would produce a Rs. 12 fee; Rs. 10,000 would produce Rs. 40; and Rs. 75,000 would produce Rs. 300. These examples are illustrative and assume that the standard rate applies without a special-category rate or exemption. Merchants should check the operative circular and their acquiring-bank agreement before adopting these figures in budgets or customer communications.

Why the Implementation Was Deferred

Diwali is a high-volume retail season for consumer durables, electronics, clothing, gifts, travel and many small businesses. A sudden change in payment acceptance costs during a peak sales period could complicate pricing, reconciliation and settlement. Merchant organisations also raised concerns about the impact on thin-margin businesses. The committee’s decision gives affected participants additional time to understand eligibility, adjust systems and prepare staff. The official statement, however, does not establish that the proposed policy has been withdrawn or that every stakeholder concern has been accepted.

Impact on Small Traders and Larger Retailers

The practical effect will differ sharply between businesses. A qualifying small merchant within the zero-MDR framework may have no additional charge on covered receipts. A retailer selling higher-value products may see a measurable reduction in contribution margin on eligible UPI collections. Businesses should analyse transaction count and value, product margins, discounts, returns and the share of payments received through UPI rather than applying the headline percentage to total turnover. For a retailer with Rs. 10 lakh of genuinely eligible receipts at 0.4%, the illustrative fee is Rs. 4,000 before considering transaction caps, category exceptions and any applicable taxes on payment services.

GST and Accounting Considerations

MDR is not itself GST on the goods or services purchased by the customer. Any GST charged on the payment-processing service must be evaluated separately under the applicable GST provisions and supporting invoice. A registered business should examine eligibility for input tax credit under section 16 of the CGST Act, 2017, including receipt of services, possession of valid tax documentation, business use and other statutory conditions. Unregistered businesses generally cannot avail GST input tax credit. In accounting records, qualifying merchant-processing fees are ordinarily analysed as payment collection or bank charges, subject to the entity’s accounting policy and the substance of the settlement statements.

Customer Pricing and Compliance Risks

A merchant should not assume that the proposed fee can automatically be added as a UPI surcharge at checkout. Contemporary descriptions of the framework indicate that the MDR is a merchant-side charge and should not be passed to customers as a separate UPI fee. The precise obligations should be checked against the final scheme directions, merchant agreement and applicable consumer protection requirements. A separate review is also needed where an aggregator bundles processing, technology, settlement or other services into a composite commercial charge.

Practical Checklist Before the New Date

Businesses should obtain the final NPCI notification and acquiring-bank communication, map eligible merchant category codes, verify any small-merchant exemptions, and reconcile settlement deductions against gross invoices. Finance teams should model the impact by payment-size band and transaction type, while operations teams should test refunds, reversals and charge reporting. Any changes to merchant pricing or customer-facing disclosures should be cleared by legal and compliance teams. It is prudent to retain the original notification, bank circular and transaction-level settlement records for future audit and dispute resolution.

Conclusion

The 13 October 2026 decision provides temporary relief during the festive season but does not settle the ultimate economics of UPI merchant acceptance. The date and full operative conditions remain central. Merchants should treat the announced post-Diwali implementation as a preparation window, not a reason to discontinue UPI or immediately change customer prices. The final notification will determine when qualifying charges actually become applicable.