The National Payments Corporation of India (NPCI) has sought to address concerns that GST on the merchant discount rate (MDR) for certain UPI payments will make digital transactions costlier for small businesses. In a clarification posted on X on September 22, NPCI said more than 96% of UPI merchant transactions by volume would remain outside the MDR framework.

MDR is a fee charged to a merchant for accepting a digital payment. GST on that fee arises only where MDR is charged; it is not a tax on the full value of the customer’s UPI payment.

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Which UPI payments are covered?

According to NPCI, person-to-merchant UPI transactions of up to ₹2,000 will continue to carry zero MDR. No GST on MDR would therefore arise on those transactions. NPCI also said merchants whose monthly UPI receipts do not exceed ₹1 lakh are exempt from MDR.

The clarification followed reports suggesting that GST on MDR would place an additional burden on small merchants. NPCI said the ₹2,000 transaction threshold leaves more than 96% of UPI merchant payments, measured by transaction volume, outside the charge. That figure refers to the number of transactions, rather than their total value.

The announced MDR is 0.4% on covered person-to-merchant transactions above ₹2,000, subject to a cap of ₹300 per transaction. It is due to take effect on October 15, 2026. 

NPCI points to input tax credit

For merchants who do pay MDR, NPCI said GST charged on the fee can be set off against GST payable on their sales through input tax credit (ITC). On that basis, the payments body argued that GST on MDR would not ultimately add to the cost for merchants able to use the credit.

ITC availability depends on the merchant’s circumstances. GST registration, the nature of the sales and the statutory conditions for claiming credit matter. A merchant who cannot claim ITC should not assume that GST paid on MDR will be fully recovered. The CGST Act restricts credit attributable to exempt supplies, for example.

NPCI’s clarification draws a distinction between the MDR itself and GST charged on MDR. An eligible merchant may be able to offset the GST component through ITC, but that does not eliminate the MDR fee. For payments below the stated thresholds, NPCI says neither MDR nor GST on MDR would arise.

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