The National Payments Corporation of India (NPCI) has categorically dismissed claims that GST on UPI Merchant Discount Rate (MDR) will burden small merchants, stating that transactions under ₹2,000 have zero MDR and no GST impact. According to NPCI's latest clarification, MDR applies only to person-to-merchant (P2M) transactions above ₹2,000, with the overwhelming majority of UPI payments remaining unaffected. As per NPCI data, transactions of up to ₹2,000 account for more than 96% of UPI merchant transaction volume, meaning the vast majority of UPI payments will not attract MDR or GST on MDR. The payments body emphasized that merchants with monthly UPI receipts of up to ₹1 lakh are not liable to pay MDR and therefore do not face GST on MDR issues. As reported by Zee News, NPCI refuted reports alleging that GST on MDR will burden small merchants, stating that apprehensions are misplaced as the overwhelming majority of UPI transactions and small merchants remain unaffected. The NPCI posted this clarification on X after reports alleged that GST on UPI MDR will burden small merchants and make digital payments costly, with the body stating "This is incorrect."
From October 15, UPI transactions will no longer be free for merchants, though individual users will continue to use the service without charges. According to The Times of India, the fee structure remains minimal with UPI transactions costing ₹2 for merchants, while individual users maintain free access. From October 15, a 0.4% MDR will apply to person-to-merchant UPI payments above ₹2,000, with the charge capped at ₹300 for transactions of ₹75,000 or more. As per Zee News, the new UPI framework has no impact on any person-to-person transactions, with UPI continuing to remain completely free for all person-to-person transactions, irrespective of the amount transferred. This change has sparked concerns among investors about potential cost increases for mutual fund transactions, with the government now actively negotiating with payment aggregators to ensure these charges don't impact consumers. The government has ruled out any rethink on the decision, with a senior official telling PTI that "There is no question of a re-think."
NPCI has clarified that GST paid by merchants on MDR can be adjusted against the GST payable on the sale of goods, in the same manner as input taxes are set off against output tax liability. As per NPCI's statement, merchants do not bear the cost of GST on the MDR amount paid by them. This mechanism effectively neutralizes the GST impact for most merchants, as they can offset the GST paid on MDR against their tax liability on other business activities. The clarification addresses concerns about additional tax burden on merchants, showing that the system is designed to maintain business viability while ensuring proper tax compliance.
For mutual fund transactions, the actual cost impact is significantly lower than initial concerns suggest. As reported by The Times of India, moving ₹1 lakh into a mutual fund through UPI results in charges of ₹24, which is paid by the fund house rather than the investor. The report indicates that SIPs on UPI AutoPay will remain free, with the fee impacting investors only if fund houses choose to include it in expense ratios instead of absorbing the cost themselves.
The government is creating dedicated support mechanisms to encourage UPI adoption among small merchants. As reported by The Times of India, a dedicated fund would be created using 5% of MDR collections to promote and accelerate UPI adoption among small merchants. Officials emphasized that this mechanism effectively balances the introduction of charges on larger merchant transactions with incentives aimed at keeping UPI attractive for smaller businesses. The government's position is that allowing some transactions to carry a cost could provide payment companies with the economic incentive needed to invest in infrastructure and innovation while preserving free UPI payments for a large share of users.
The new UPI framework includes specific exemptions for essential and thin-margin sectors to maintain cost certainty. According to Zee News, transactions above ₹2,000 in essential and thin-margin sectors, including railways, telecommunications, insurance, fuel and agricultural inputs, will attract a flat MDR of ₹5 per transaction. This flat charge provides cost certainty for critical public services and businesses operating on narrow margins. The Finance Ministry has clarified that MDR is neither a tax nor a charge collected by the Government or NPCI, but is distributed among payment ecosystem participants including banks, payment service providers and UPI application providers to support the operation and continued expansion of the UPI ecosystem.
