Summary: The change concerning UPI payments from 15 October 2026 does not impose GST on the amount transferred by a customer. The new arrangement described in the article concerns Merchant Discount Rate, or MDR, charged to merchants on specified UPI business payments. UPI payments to shops up to two thousand rupees continue to be free, while payments above that level attract MDR at 0.4 percent, subject to a maximum fee of three hundred rupees for payments of seventy-five thousand rupees and above. Certain payments for fuel, railway tickets, mobile recharges and insurance premiums carry a flat five-rupee fee. Person-to-person transfers and qualifying zero-MDR merchants remain unaffected. GST at eighteen percent applies only to the MDR charged by the bank because MDR represents a banking service; it is not calculated on the customer’s purchase amount. The article states that merchants should not pass the MDR on to customers. GST-registered businesses may claim input tax credit of GST paid on MDR, subject to the applicable conditions and proper reflection in GSTR-2B, whereas composition taxpayers and unregistered businesses cannot claim such credit. The framework is presented as preserving free everyday UPI use while requiring merchants receiving certain higher-value payments to contribute towards payment-system costs.
Over the past week, hardly a day has passed without someone asking me whether the government is now going to collect GST on UPI payments. The question has come from shopkeepers in our town, from clients who run businesses in Sri City, and even from elderly people in my family who use PhonePe only to pay the milkman and the electricity bill. Their worry is understandable. A few messages going around on WhatsApp claim that 18% GST will be deducted every time someone scans a QR code. When something as common as UPI is involved, such messages spread fast and cause real anxiety.
So I thought it would be useful to put down, in plain language, what has actually happened and what it means for an ordinary person.
- No GST on the Amount Paid Through UPI
- What Has Changed for Merchants?
- Payments Covered by the New MDR
- GST Applies to MDR, Not the Purchase Amount
- How the Charges Work: Examples
- Can a Shopkeeper Pass MDR on to the Customer?
- Impact on Small and Large Merchants
- Input Tax Credit of GST Paid on MDR
- Why Has an MDR Been Introduced?
- What UPI Users and Merchants Should Do
No GST on the Amount Paid Through UPI
The first thing everybody should know is that there is no GST on the money you pay through UPI. If you send five thousand rupees to your son studying in Hyderabad, or pay four hundred rupees at the medical shop, or pay fifty thousand rupees to a furniture dealer, not one rupee of GST is charged on that amount merely because you used UPI. GST was never charged on the transfer of money, and nothing in the recent announcement changes that position.
What Has Changed for Merchants?
What has changed is something quite different, and it concerns the shopkeeper rather than the customer. On 15 September 2026, the National Payments Corporation of India, which runs the UPI system, issued a circular bringing in a small fee called the Merchant Discount Rate, or MDR, on certain UPI payments made to shops and businesses. This will come into effect from 15 October 2026.
Many readers will already be familiar with MDR without knowing its name. When you pay by credit card at a shop and the shopkeeper asks for two percent extra, that is because the bank is charging him a fee for accepting the card. That fee is MDR. For UPI, the government had done away with this fee from January 2020 so that digital payments would spread quickly across the country. That is the reason UPI has been completely free for the last six years, both for the person paying and for the shop receiving the money.
Payments Covered by the New MDR
Under the new arrangement, UPI payments to a shop up to two thousand rupees will continue to be free. When the payment to a shop crosses two thousand rupees, the shopkeeper will pay a fee of 0.4 percent to his bank. For very large payments of seventy-five thousand rupees and above, this fee will not go beyond three hundred rupees, however large the amount may be. Payments above two thousand rupees for fuel, railway tickets, mobile recharges and insurance premiums will carry a flat fee of five rupees. Money sent from one person to another, such as between family members and friends, remains entirely free. Small merchants who fall within the zero-MDR category will also continue to pay nothing.
GST Applies to MDR, Not the Purchase Amount
This is the point at which GST enters the discussion, and it is where most of the confusion has arisen. The MDR is a service provided by the bank to the shopkeeper, and like any other bank service, it attracts GST at eighteen percent. But this GST is calculated only on the small MDR amount, not on the value of the purchase.
How the Charges Work: Examples
Take the case of a person buying a television for forty thousand rupees and paying through UPI. The shopkeeper will pay one hundred and sixty rupees as MDR to his bank, and GST on that will be twenty-eight rupees and eighty paise. The customer pays nothing extra. If a person pays one lakh rupees to a builder, the MDR stops at three hundred rupees and the GST on it comes to fifty-four rupees, again borne by the builder and not by the customer. When someone fills petrol for three thousand rupees, the petrol bunk pays five rupees plus ninety paise as GST. And when a college student pays eight hundred rupees at the canteen, there is no fee and no GST at all.
Can a Shopkeeper Pass MDR on to the Customer?
A natural question is whether the shopkeeper can simply add this charge to the customer’s bill. The answer is no. The Finance Ministry has made it clear that MDR is a cost within the merchant payment system and is not meant to be collected from customers. Banks have been advised to ensure that merchants do not pass it on to buyers, and UPI apps are not permitted to add any hidden platform fee. If a shop insists on collecting “UPI charges” over and above the bill, the customer is well within his rights to refuse and may raise a complaint through his UPI app or with the shop’s bank.
Impact on Small and Large Merchants
For the small tea stall, the vegetable vendor or the neighbourhood kirana shop, the practical impact is close to nothing, since most of their sales are well below two thousand rupees and many of them are covered by the zero-MDR category in any case. Larger showrooms and dealers will feel a small cost, but it is worth putting that cost in perspective. On a sale of fifty thousand rupees, a shop pays somewhere between seven hundred and fifty and twelve hundred and fifty rupees if the customer uses a credit card, and up to four hundred and fifty rupees on a debit card. The same sale through UPI will cost the shop two hundred rupees. Even after the change, UPI remains the cheapest way for a business to receive digital payments.
Input Tax Credit of GST Paid on MDR
There is also some relief for businesses registered under GST. The eighteen percent GST paid on MDR is not a dead cost for a regular taxpayer. It can be claimed as input tax creditin the same way as GST paid on a telephone bill or on office rent. For this, the business should make sure that its GSTIN is updated with its bank and payment provider, and should check that the invoices raised by them are reflected in GSTR-2B every month. Businesses under the composition scheme and those who are not registered under GST will not be able to take this credit, so for them the GST on MDR will remain a small expense.
Why Has an MDR Been Introduced?
Many people have asked me why the government has taken this step when it had earlier made UPI free. I think it helps to understand what goes on behind every UPI payment. Each transaction passes through the customer’s bank, the shop’s bank, NPCI and the payment app. Maintaining servers, preventing fraud, securing data and handling complaints all cost money. Since 2020, banks and payment apps were carrying this load without earning anything from UPI, and the government had been compensating them through an incentive scheme funded from the budget, which ultimately means from taxpayers’ money. As UPI grew to billions of transactions every month, this arrangement was becoming difficult to sustain.
The new framework appears to be an attempt to share that cost fairly. The common man and the small trader continue to use UPI without any charge, while those receiving high-value business payments contribute a little towards the system that serves them. According to NPCI, only about four percent of merchant UPI transactions will attract this fee, though these transactions account for roughly two-thirds of the total value of merchant payments. In other words, the fee falls where the money is large and leaves the everyday user untouched.
What UPI Users and Merchants Should Do
My advice to readers is simple. Do not be misled by forwarded messages. Your UPI payment is not taxed, sending money to family remains free, and paying small amounts at shops remains free. If you run a business, update your GSTIN with your bank and make sure you claim the credit that is due to you. If you are a customer, continue using UPI exactly as you always have.
This article is meant for general awareness and reflects the position as on 24 September 2026. Readers may refer to the NPCI circular and communication from their own bank for the precise terms applicable to them.
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The author Suneel Kumar Kota from Kota Associates is an Advocate practising in indirect taxation and GST at Gudur, Andhra Pradesh.
