UPI Merchant Charges Explained: Who Pays MDR in 2026?

UPI merchant charges at a glance

• Normal bank account UPI payments: No MDR under the current position.
  
• Customer charge: No new customer fee has been notified.
  
• 2026 Bill: Changes how charge-free payment modes may be named. It does not set a fee, rate, threshold or start date.
  
• Wallet-funded UPI: Provider interchange can apply to certain merchant payments above ₹2,000. This is not a charge on every UPI payment above ₹2,000.
  
• GST: No GST applies to the payment value only because a UPI payment exceeds ₹2,000. GST may apply to a separate payment service fee.
  
• July 2026 UPI data: 23.66 billion payments worth ₹29.88 lakh crore.
  
• Next documents to watch: Rajya Sabha action, presidential assent, Gazette publication, a Central Government notification and NPCI or RBI operating rules.
  

UPI does not run without cost. Banks check accounts, payment apps send instructions, NPCI routes messages, fraud systems screen payments and merchant banks complete settlement. Since January 2020, however, the law has stopped banks and payment system providers from charging the person who makes or receives a payment through prescribed modes that include BHIM-UPI and UPI QR.

That position has not changed for a shop or customer today. What changed in August 2026 is the route through which the protection may be decided in future. The Taxation and Other Laws (Amendment) Bill, 2026 replaces the link to payment modes prescribed under income-tax law with payment modes that the Central Government may specify by notification. The Lok Sabha passed the Bill on 6 August.

This does not create an MDR rate. It creates room for a later decision. Reports say policymakers have discussed charging some larger merchants or some payments above ₹2,000, while keeping customers and small merchants outside the charge. Those details are proposals, not rules.

The distinction matters because UPI handled 23.66 billion payments worth ₹29.88 lakh crore in July 2026. A change of even 0.3% on part of that merchant value would move money between merchants, banks and payment firms. This guide explains what is free, what can carry a fee, what the Bill says and which document to watch next.

What is a UPI merchant payment?

A person-to-merchant payment, shown as P2M in official data, is a UPI payment made to a business. It can happen at a shop counter, on a website, inside an app or through a payment link. The payer may scan a QR code, enter a UPI ID or approve a request.

A transfer to a friend or family member is usually treated as a person-to-person payment, shown as P2P. The distinction matters because MDR is a merchant acceptance charge. It is not the same as a fee on a personal bank transfer.

What is MDR?

Merchant Discount Rate, or MDR, is the fee a business pays for accepting and processing a digital payment. The fee is normally calculated as a percentage of the sale amount. The money can be shared among the merchant's bank, the customer's bank, the payment network and the service provider under the applicable payment arrangement.

The word "discount" can confuse readers. It is not a discount given to the customer. It is a payment processing cost deducted from or billed to the merchant.

What is interchange?

Interchange is a payment made by one provider in the payment chain to another provider. In a wallet-funded UPI merchant payment, for example, the provider serving the merchant may have to pay the wallet issuer. The merchant's contract decides whether the provider absorbs that cost or bills some cost to the merchant.

Interchange and MDR are linked in payment pricing, but they are not the same line item. Interchange is one part of the provider-to-provider economics. MDR is the merchant-facing charge.

What is a prepaid wallet?

A prepaid payment instrument, or PPI, stores money before it is spent. A mobile wallet is one example. A normal UPI payment usually draws money from the bank account selected in the app. A wallet-funded UPI payment draws money from the stored wallet balance.

This source of funds, not the logo on the app, decides which rule may apply. The same app may let a user pay from a bank account, a wallet or a credit product.

What is a service fee?

A payment company may sell a merchant a soundbox, payment gateway, dashboard, software plan, settlement service or support package. A monthly rental or subscription for such a service is not automatically MDR. Zero MDR on a payment does not make every merchant product free.

Merchants should read the invoice and contract. A charge described as device rental, software, payment gateway, settlement, support or subscription needs to be tested against the service bought. It should not be presented as a government UPI charge when it is a private service fee.

Which UPI payments can carry a charge today?

What happened in August 2026?

Finance Minister Nirmala Sitharaman introduced the Taxation and Other Laws (Amendment) Bill, 2026 in the Lok Sabha on 4 August 2026. The Lok Sabha passed it on 6 August.

The Bill covers several tax measures. Clause 2 deals with digital payment charges by amending Section 10A of the Payment and Settlement Systems Act, 2007.

The existing Section 10A protects payment modes prescribed under Section 269SU of the Income-tax Act. Those prescribed modes include RuPay debit cards, BHIM-UPI and BHIM-UPI QR. The Bill removes that link and says the no-charge protection will apply to one or more payment modes that the Central Government may specify by notification.

The change would take effect from the date on which the enacted law is published in the Official Gazette. The Bill does not name a UPI MDR rate. It does not set a ₹2,000 threshold. It does not state that customers will pay. It does not itself classify small and large merchants.

As of 8 August, the correct status is:

1. The Lok Sabha has passed the Bill.
   
2. The Bill has not, by itself, created a UPI charge.
   
3. The current payment experience remains unchanged.
   
4. A later government notification will decide which modes retain the direct and indirect charge ban if the Bill becomes law.
   

For the daily news update on the Bill, read Will UPI Payments Become Chargeable?.

What the official law and Bill say

The current position

Section 10A of the Payment and Settlement Systems Act, 2007 says that a bank or payment system provider cannot impose a direct or indirect charge on a person making or receiving payment through the prescribed electronic modes.

The Income Tax Department's explanation of Circular 32/2019 lists three prescribed modes:

1. RuPay debit card
   
2. BHIM-UPI
   
3. BHIM-UPI QR code
   

It also states that any charge, including MDR, would not apply from 1 January 2020 to payments made through those modes.

What the Bill does not answer

The Bill does not answer the questions a merchant needs for pricing:

• Will normal bank-account UPI remain protected?
  
• Will the rule differ for small and large merchants?
  
• Will any threshold be based on payment value, merchant turnover or both?
  
• Will the rate be capped?
  
• Will the customer remain protected from direct and indirect charges?
  
• How will GST apply to a new processing fee, if one is introduced?
  
• Will the government incentive scheme continue alongside MDR?
  

These points require a later notification, rules, directions or payment network circulars.

Who is affected?

Customers

There is no new customer fee for normal UPI payments. A person paying ₹50, ₹500 or ₹5,000 from a bank account does not face a new government charge because the Lok Sabha passed the Bill.

If a merchant fee is introduced later, a customer may still see an indirect effect if a business changes prices, minimum order rules or payment choices. That is a possible market response, not a fee announced by the government.

Small merchants

Kirana stores, street vendors and other businesses with low payment values depend on zero-cost acceptance. Official data released in April 2026 says 86% of UPI merchant payments were below ₹500. This makes the treatment of small merchants a central policy choice.

The reported proposals under discussion would keep small businesses outside MDR, but no official rule has set the definition, turnover test or payment threshold.

Large merchants and online businesses

Large retailers, billers, travel companies, online marketplaces and other businesses handling payments above ₹2,000 are the likely focus of any later pricing plan. Reuters reported that one proposal under discussion involved MDR of 0.3% to 0.5% on payments above ₹2,000 for merchants with annual turnover above ₹1.5 crore. This is a reported proposal, not an official rate.

Banks and payment firms

Banks, payment apps, merchant acquirers and gateways pay for processing, fraud control, disputes, security, customer support and merchant service. Under zero MDR, government incentives and revenue from other products help cover part of this cost.

The Union Budget 2026-27 expenditure statement provides a Budget Estimate of ₹2,000 crore for the incentive scheme covering RuPay debit cards and low-value BHIM-UPI merchant payments. The budget entry supports the payment system, but it is not an MDR notification.

Wallet issuers

Wallet issuers already operate under a separate provider interchange system for some wallet-funded UPI merchant payments. This rule is often confused with a charge on normal UPI. It does not turn a bank-account UPI payment into a paid transaction.

What changed from the previous position?

Does GST apply to UPI payments above ₹2,000?

No GST is imposed on the value of a UPI payment merely because it exceeds ₹2,000.

In April 2025, the Ministry of Finance rejected claims of GST on UPI payments above ₹2,000. It explained that GST applies to a payment service charge such as MDR. Since no MDR was being charged on normal UPI P2M payments, there was no GST on such an MDR.

If a processing fee is introduced later, readers must check the tax treatment of that fee. GST, if applicable, would be calculated on the service fee, not on the full value of the goods or the UPI transfer. The sale itself will continue to follow the GST rules that apply to the goods or services bought.

FY 2025-26

The Ministry of Finance's UPI 10-year note reported:

The same official note reported that merchant payments accounted for 63% of UPI volume in the H1 2025 split. Personal transfers accounted for 71% of value. It also reported that 86% of merchant payments were below ₹500.

Related reading block: BFSI news and explainers

Latest developments on UPI Charges

Lok Sabha passes the 2026 Bill

The Lok Sabha passed the Bill on 6 August 2026. The change gives the Central Government a direct notification route for selecting the payment modes protected from direct and indirect charges.

No UPI MDR rate has been notified

No official order has set a 0.3%, 0.5% or other MDR rate for normal bank-account UPI as of 8 August. Reports about rates, payment thresholds and turnover limits remain proposals.

Customers remain outside the reported MDR plan

Finance Minister Nirmala Sitharaman said during the current debate that MDR applies to merchants, not customers. The statement addresses direct customer charging. The final notification and merchant terms will still need to show how indirect charges are prevented.

Budget support continues in FY 2026-27

The Union Budget provides ₹2,000 crore as a Budget Estimate for the RuPay and low-value BHIM-UPI incentive line in FY 2026-27. This indicates continued public funding during the current year. It does not decide whether an MDR will be added for another segment.

UPI sets a July record

UPI processed 23.66 billion payments worth ₹29.88 lakh crore in July 2026. Both were above June. The scale makes payment pricing a budget, competition and merchant issue, not only a bank fee issue.

UPI Regulation Timeline 

News4Bharat analysis

The August Bill is a policy switch, not a price list.

The current law ties zero charges to a list created through income-tax law. The Bill moves the selection power into the payment law and gives the Central Government a notification route. That makes the system easier to revise. It also means a future reader will have to check both Section 10A and the notification in force on the transaction date.

The data points towards a split policy rather than one charge for all merchants. Merchant payments account for 63% of UPI volume, and 86% of merchant payments are below ₹500. A broad MDR would touch routine purchases and could cause small businesses to prefer cash. A rule limited by merchant turnover or payment size would protect more of that use while allowing payment firms to earn from a smaller part of the value.

The first test is not the rate. It is the next Gazette notification. That document will show whether normal UPI remains protected, whether protection is narrowed and whether the government plans a separate charging framework.

Data and Research Stories to Read Next

Will UPI Payments Become Chargeable? What Users Should Know Before Worrying: the current Bill update.

The Hidden Winners of India's UPI Boom Are Not the Payment Apps: the infrastructure, soundbox, lending and fraud-control economy around UPI.

How India's Fintech Firms Learned to Make Money: how payment firms earn when normal UPI MDR is zero.

NPCI Is Changing How You See a UPI Recipient Before You Pay: the merchant-name and payment-safety change.

Sources: 

• Payment and Settlement Systems Act, 2007, India Code
  
• Taxation and Other Laws (Amendment) Bill, 2026, Bill No. 150 of 2026
  
• Lok Sabha Bills status page
  
• Income Tax Department explanation of prescribed modes and Circular 32/2019
  
• NPCI UPI product statistics
  
• NPCI UPI circulars
  
• RBI Discussion Paper on Charges in Payment Systems, August 2022
  
• Cabinet decision on the FY 2024-25 low-value BHIM-UPI incentive scheme
  
• Ministry of Finance clarification on GST and UPI charges, 18 April 2025
  
• Ministry of Finance note on 10 years of UPI, 30 April 2026
  
• Union Budget 2026-27, Statement 4B on Central Sector Schemes
  
• RBI rules on reversal and compensation for failed UPI transactions