Overview : The new Merchant Discount Rate (MDR) framework for specified UPI merchant transactions will take effect from 15 October 2026. While UPI payments themselves are not being subjected to a separate GST, the MDR charged on eligible transactions will attract GST at 18%. According to the reported government position, eligible GST-registered businesses can claim this GST as input tax credit (ITC), subject to the normal GST conditions. Composition taxpayers cannot claim regular ITC, while unregistered merchants have no ITC mechanism.
For businesses accepting digital payments, the introduction of UPI MDR raises a practical GST question: does the GST charged on the MDR become an additional cost, or can the merchant claim it back as input tax credit?
The distinction is important. The new framework does not impose 18% GST on the value of the UPI payment itself. GST applies to the applicable MDR or payment-processing charge. For an eligible regular GST-registered business, the GST paid on that service may be claimed as input tax credit (ITC), subject to the applicable conditions and documentation.
The revised MDR framework will apply from 15 October 2026 to specified Person-to-Merchant (P2M) UPI transactions above ₹2,000.
UPI MDR from 15 October 2026
The new framework applies only to specified merchant transactions. Person-to-Person (P2P) UPI payments remain free, while P2M transactions up to ₹2,000 also remain outside the MDR framework. Qualifying small merchants under the P2PM category, receiving up to ₹1 lakh per month through UPI QR codes, also continue to receive zero MDR.
For specified P2M transactions above ₹2,000, the standard MDR is 0.4%. For transactions of ₹75,000 and above, the MDR is capped at ₹300 per transaction. Certain specified sectors, including railways, telecommunications, insurance and fuel, have a flat ₹5 MDR for transactions above ₹2,000. Capital-market transactions carry a separate 0.02% MDR, capped at ₹300.
The MDR is paid within the merchant payment ecosystem. It is not a separate charge imposed on customers for using UPI.
GST on MDR: What Changes for Businesses?
The GST treatment is different from the underlying UPI payment.
Where an eligible MDR is charged, 18% GST applies to the MDR or applicable payment-processing fee, rather than to the underlying transaction value. Government officials have indicated that GST-registered businesses can claim the GST paid on MDR as ITC, subject to the normal conditions for claiming input tax credit.
For example, consider an eligible UPI merchant transaction of ₹10,000:
- MDR at 0.4% = ₹40
- GST at 18% on ₹40 = ₹7.20
- Total MDR-related charge = ₹47.20
The ₹7.20 GST is not GST on the ₹10,000 customer payment. It is GST on the payment service represented by the MDR. If the merchant is eligible for full ITC, the ₹7.20 may be claimed as input tax credit, subject to the applicable GST requirements.
Who Can Claim ITC on MDR?
The ITC position depends on the merchant’s GST status and the normal conditions governing input tax credit.
| Merchant Category | GST on Applicable MDR | ITC Position |
|---|---|---|
| Regular GST-registered business | 18% on applicable MDR | ITC may be claimed, subject to applicable conditions |
| Composition taxpayer | 18% on applicable MDR | No regular ITC |
| Unregistered merchant | 18% on applicable MDR | No ITC |
For a regular GST-registered business, the availability of ITC on MDR should not be treated as automatic. The business should satisfy the applicable GST requirements, maintain the required tax documentation and ensure that the credit relates to eligible business use.
There can also be a difference where a business makes exempt supplies or otherwise falls under ITC restrictions. In such cases, the entire GST paid on MDR may not necessarily be available for credit.
What Businesses Should Check
Businesses accepting UPI payments should prepare their accounting and GST records before the revised MDR framework takes effect.
They should:
- Obtain and preserve the relevant MDR tax invoice or supporting tax documentation.
- Verify the merchant’s GSTIN and tax details with the bank, payment aggregator or other service provider.
- Reconcile MDR charges with the books of account and GST records.
- Check whether the corresponding ITC is properly reflected in the relevant GST records before claiming it.
- Apply the normal ITC eligibility and utilisation rules.
- Separately identify transactions or business activities where ITC may be restricted or unavailable.
This becomes particularly important for businesses using multiple payment aggregators or banking channels, where MDR charges may appear across different settlement statements and invoices.
GST Council May Consider Related Issues
The introduction of UPI MDR has also raised questions concerning businesses that are not registered under GST but may fall outside the small-merchant zero-MDR framework.
The Government has indicated that issues arising from implementation may be examined through the GST Council. However, businesses should distinguish between the current framework and any future decision by the Council. A possible discussion or review does not itself change the applicable GST law.
For this reason, businesses should follow the applicable rules and official clarifications rather than relying on assumptions about possible future changes.
FAQs
Is GST charged on the entire UPI transaction?
No. The GST applies to the applicable MDR or payment-processing charge, not to the underlying amount paid by the customer through UPI. For example, on a ₹10,000 transaction attracting ₹40 MDR, the 18% GST would be ₹7.20 on the MDR.
Can a GST-registered merchant claim ITC on GST paid on MDR?
An eligible regular GST-registered merchant may claim the GST paid on MDR as input tax credit, subject to the normal GST conditions and documentation requirements. Government officials have confirmed this position in relation to the new UPI MDR framework.
Can composition taxpayers claim ITC on MDR?
No. Composition taxpayers cannot claim regular input tax credit. Therefore, the GST component of an applicable MDR would generally form part of their cost.
Will all UPI payments above ₹2,000 attract MDR?
No. The framework applies to specified person to merchant transactions. Person to person transactions remain free, P2M payments up to ₹2,000 remain free, and qualifying small merchants under the Person to Person Merchant framework continue to receive zero MDR.
What is the standard MDR for eligible UPI merchant transactions?
The standard MDR is 0.4% for specified P2M transactions above ₹2,000, with a cap of ₹300 for transactions of ₹75,000 and above. Certain categories, such as specified essential services and capital-market transactions, have separate rates.
What should businesses do before claiming ITC on MDR?
Businesses should verify the applicable tax invoice and GST details, reconcile the MDR with their books and GST records, and ensure that the credit satisfies the normal ITC eligibility conditions. Businesses making exempt supplies or subject to other ITC restrictions should also check whether the full credit is available.
Setindiabiz Support
The introduction of GST on UPI MDR makes payment-processing charges another area that businesses need to reconcile with their GST records. While eligible GST-registered businesses may claim ITC on MDR, the credit still has to satisfy the applicable GST conditions.
Setindiabiz supports businesses with GST compliance and related services, including GST registration, return filing, ITC reconciliation and review of transaction-level compliance requirements.
Businesses accepting digital payments should keep their MDR invoices, GSTIN details, books and GST returns properly reconciled so that eligible input tax credit can be identified and claimed correctly.
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Author Bio
Setindiabiz Editorial Team is a multidisciplinary collective of Chartered Accountants, Company Secretaries, and Advocates offering authoritative insights on India’s regulatory and business landscape. With decades of experience in compliance, taxation, and advisory, they empower entrepreneurs and enterprises to make informed decisions.
