UPI Charges From October 15, 2026: New MDR Rules for Merchants & Customers Explained
Direct Summary: Starting October 15, 2026, revised Merchant Discount Rate (MDR) and interchange guidelines come into focused effect across Indian payment networks. For retail consumers, the rule remains absolute: UPI payments remain 100% free for customers. No individual will be charged for sending money to friends, family, or paying at shops using their standard savings bank account. The updated October 2026 rules apply strictly to commercial acquiring settlements on high-ticket commercial transactions exceeding ₹2,000 conducted through Prepaid Payment Instruments (PPI digital wallets) and commercial credit card linkages on UPI. Normal bank-to-bank UPI transfers via static and dynamic QR codes continue to carry zero MDR under statutory central mandates. Merchants must understand the exact settlement deductions, avoid prohibited consumer surcharges, and reconcile payment processor invoices ahead of October 15.
What Is Changing in UPI From October 15, 2026?
India's Unified Payments Interface processes over 15 billion transactions every month. To balance ecosystem infrastructure costs while protecting consumer adoption, the National Payments Corporation of India (NPCI) and acquiring commercial banks have clarified interchange and processing tiers. The change is not an across-the-board levy on UPI; rather, it formalizes settlement pricing when high-cost payment rails—such as PPI wallets and commercial credit instruments—interact with merchant acquiring accounts on transactions above ₹2,000.
| Payment Rail / Method | Transaction Amount | Applicable MDR | Who Bears Fee | Regulatory & Statutory Basis |
|---|---|---|---|---|
| P2P (Bank to Bank) | Any amount | 0.00% (Free) | None | Section 10A, Payment & Settlement Systems Act |
| P2M (Direct Bank UPI QR) | Any amount | 0.00% (Zero MDR) | None | Government Zero-MDR mandate for bank accounts |
| PPI Wallet on UPI (P2M) | Up to ₹2,000 | 0.00% | None | NPCI micro-payment concession |
| PPI Wallet on UPI (P2M) | Above ₹2,000 | Up to 1.10% | Merchant / Acquirer | Interchange pricing on wallet load settlements |
| RuPay Credit Card on UPI | Up to ₹2,000 | 0.00% | None | Small-ticket exemption for micro-merchants |
| RuPay Credit Card on UPI | Above ₹2,000 | Standard Card MDR (~1.5%–2.0%) | Merchant | RBI Credit Card framework (merchants >₹20L turnover) |
| Online PG / Web Checkout | Commercial volume | Contractual PG rate | Merchant | Payment aggregator commercial agreement |
Are UPI Payments Still Free for Customers?
Yes. A widespread misconception circulated on social media claims that everyday UPI payments will soon carry a tax or surcharge. This is unequivocally false:
- Person-to-Person (P2P): Sending money from your savings account to a friend's or family member's phone number or UPI ID is 100% free with zero charges.
- Retail Shop Payments (P2M): Scanning a merchant's BharatPe, Google Pay, PhonePe, or Paytm QR code from your bank account incurs zero convenience fee for the consumer.
- Zero Legal Surcharge: Under Reserve Bank of India directives, merchants cannot levy a surcharge or "convenience fee" on consumers who pay via standard UPI. The total bill presented on your tax invoice is the exact amount deducted from your bank.
What Is UPI MDR?
Merchant Discount Rate (MDR) is the processing fee charged to a commercial merchant by payment service providers (acquirers, card networks, and switch processors) for facilitating digital payment transactions. MDR is not paid by the customer; it is deducted by the acquiring bank before settling the net proceeds into the business bank account.
Real Calculation Example (Commercial Transaction)
Suppose an electronics retailer sells a computer component for ₹10,000, and the customer pays using an eligible prepaid wallet or commercial credit instrument attracting 1.1% MDR:
STATUTORY NOTE: The ₹19.80 GST is levied on the banking processing service under SAC 997159, which the merchant can claim as an Input Tax Credit (ITC) if GST-registered.
UPI Charges Above ₹2,000 — Explained With Examples
The ₹2,000 threshold represents a critical regulatory dividing line. For transactions below or equal to ₹2,000, interchange fees are universally waived across retail categories to safeguard small commerce. The table below illustrates how different ticket sizes behave:
| Bill Amount | Payment Method | Customer Deducted | Merchant Fee (MDR) | Net Merchant Deposit |
|---|---|---|---|---|
| ₹1,000 | Bank UPI or Wallet | ₹1,000.00 | ₹0.00 | ₹1,000.00 |
| ₹2,000 | PPI Wallet on UPI | ₹2,000.00 | ₹0.00 (Exempt under threshold) | ₹2,000.00 |
| ₹2,001 | PPI Wallet on UPI | ₹2,001.00 | ₹22.01 (1.1% on full value) + GST | ₹1,975.03 |
| ₹5,000 | Bank Account UPI | ₹5,000.00 | ₹0.00 (Standard Bank UPI) | ₹5,000.00 |
| ₹10,000 | RuPay Credit Card on UPI | ₹10,000.00 | ₹180.00 (Standard card interchange) | ₹9,820.00 |
| ₹50,000 | Commercial Invoice Bank UPI | ₹50,000.00 | ₹0.00 (Direct Bank Account) | ₹50,000.00 |
| ₹75,000+ | Online Payment Gateway | ₹75,000.00 | Per Aggregator Contract (e.g. 1%) | Net after PG fee |
What This Means for Small Shops and Businesses
For 95% of retail stores, neighborhood kirana shops, pharmacies, and small cafes, the practical day-to-day impact is virtually zero. Here is the operational reality by industry:
- Kirana & Grocery Retailers: Over 90% of neighborhood purchases are under ₹1,000, and nearly all customers pay directly from bank accounts. Settlement remains 100% fee-free.
- Restaurants & Dining: Table bills over ₹2,000 paid through wallets or credit-linked UPI may see interchange deducted on the merchant statement. Review settlement statements weekly.
- Freelancers & Service Providers: If receiving fees via bank-linked UPI QR, no MDR applies. If receiving through online checkout links or merchant gateway accounts, standard gateway fees apply.
- Medical Clinics & Pharmacies: Healthcare institutions enjoy special lower capped interchange tiers under NPCI category codes (MCC 8011/8062).
Static UPI QR vs Dynamic UPI QR
Businesses accept UPI payments through two distinct types of QR codes. Choosing the right format ensures compliance and minimizes settlement discrepancies:
Static UPI QR Code
Printed on counter stands or stickers. Encodes only your Merchant VPA (UPI ID) and business name. The customer enters the bill amount manually on their phone. Ideal for small retail shops with simple billing.
Dynamic UPI QR Code
Generated in real time per transaction or invoice. Encodes the exact invoice amount, invoice reference number, and merchant VPA. The customer scans and clicks 'Pay' without typing the number, preventing underpayment.
You can create customized, printable static and dynamic QR codes for your business counter using the free BharatBills tool:
Does GST Apply to UPI MDR?
A critical accounting distinction must be maintained between the GST on the goods or services you sell and the GST on payment processing fees:
- GST on Underlying Sale: When you sell an item with 18% GST for ₹10,000, you collect ₹1,800 GST from the customer on your tax invoice. That GST belongs to the tax authorities under Chapter/HSN classification rules.
- GST on Payment Processing MDR: The payment processor's fee (e.g., ₹110) is a banking and financial service subject to 18% GST (₹19.80) under SAC 997159. The payment processor issues a monthly GST tax invoice to you with their GSTIN.
- Input Tax Credit (ITC): As a registered business under Section 16 of the CGST Act, you can claim the ₹19.80 GST on MDR as an Input Tax Credit against your output tax liability, provided it appears in your GSTR-2B.
Use the BharatBills GST Calculator to calculate statutory tax rates and generate compliant tax invoices.
UPI + Invoice Payments: What Businesses Should Know
When issuing B2B or consumer tax invoices, accurate payment reconciliation protects your audit trail:
- Invoice Total vs Settlement: Your sales ledger must record the gross invoice total. The MDR fee should be recorded separately as an operating finance expense, not as an invoice discount.
- Record UTR Numbers: Always request the 12-digit UPI Transaction Reference (UTR) number on high-value settlements above ₹2,000 to match bank credits with invoice slips.
- Cash vs Digital Receipts: If a customer splits payment between cash and UPI, verify cash limits under Section 269ST (₹2 Lakh ceiling) and reconcile physical currency with the BharatBills Cash Denomination Counter.
How Accountants Record UPI MDR in Tally & Accounting Software
A common mistake among small business owners is recording the net bank deposit as the total sales revenue. This underreports gross sales and distorts GST liability. Indian accounting standards require recording the gross invoice amount, booking the payment gateway fee as a finance operating cost, and capturing input tax credit.
| Ledger Account | Account Head / Classification | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Bank Current Account | Current Asset (Net Credit) | ₹9,870.20 | — |
| Payment Gateway / Bank Charges (MDR) | Finance & Operating Expense | ₹110.00 | — |
| Input CGST (9%) on MDR | Duties & Taxes (ITC Asset) | ₹9.90 | — |
| Input SGST (9%) on MDR | Duties & Taxes (ITC Asset) | ₹9.90 | — |
| To Sales Revenue (Gross Invoice) | Operating Revenue (Credit) | — | ₹10,000.00 |
By recording the full ₹10,000 in sales, your turnover matches your GST returns (GSTR-1), while the ₹19.80 in input tax credit offsets output tax in your monthly GSTR-3B return.
Frequently Asked Questions
Is UPI still free in 2026?
Yes. Standard UPI transactions from your savings bank account to another person or merchant are 100% free for consumers. No charges apply to ordinary retail payments.
Will customers pay UPI charges?
No. Under Reserve Bank of India directives, merchants cannot pass payment gateway or MDR costs to consumers. Surcharging customers for choosing UPI is legally prohibited.
What happens to UPI payments above ₹2,000?
Bank-to-bank UPI transfers above ₹2,000 remain completely free. Only commercial transactions above ₹2,000 paid via PPI wallets (like Paytm/PhonePe wallet balance) or commercial credit cards on UPI attract merchant-side interchange fees.
Does UPI MDR apply to P2P payments?
No. Person-to-Person (P2P) transfers between family members, friends, or personal accounts never attract MDR, regardless of the transaction amount.
Who pays UPI MDR?
MDR is paid by the merchant (the seller receiving the payment). It is deducted by the acquiring bank/payment aggregator during final payout settlement.
Does GST apply to UPI MDR?
Yes. 18% GST applies strictly to the MDR processing fee charged by the bank or payment aggregator. GST-registered businesses can claim this as Input Tax Credit (ITC).
Are small merchants exempt from RuPay Credit on UPI charges?
Yes. Micro-merchants with annual turnover up to ₹20 Lakh are exempted from MDR on RuPay Credit Card transactions up to ₹2,000 per transaction.
Are UPI QR payments affected?
Standard static and dynamic bank QR payments are completely unaffected and settle at zero MDR into business current or savings accounts.
What happens if a customer pays using third-party apps like Cred or Slice?
If the customer funds the transaction through their linked bank account via UPI, the payment settles at zero MDR. Only if they use a credit card or prepaid balance linked to the app does credit-card interchange apply for amounts above ₹2,000.
Can a merchant refuse to accept wallet payments above ₹2,000?
Merchants using standard UPI soundboxes or QR codes automatically accept all UPI rails. However, acquiring banks allow merchants to toggle credit card or PPI acceptance in their merchant app dashboards if they wish to restrict specific instruments.
What Businesses Should Check Before October 15, 2026
- 1. Review Acquirer Terms: Check the merchant acquiring agreement with your bank or POS soundbox provider (Paytm, PhonePe, BharatPe, Pine Labs) for updated pricing notices.
- 2. Inspect Weekly Settlement Reports: Confirm whether net settlements match gross sales or show interchange deductions on high-ticket wallet payments.
- 3. Verify GST Invoicing on Fees: Ensure your acquiring provider has your correct GSTIN on file so MDR fee invoices appear in your monthly GSTR-2B.
- 4. Maintain Zero Surcharge: Never add an unauthorized surcharge or card fee to customer bills, as it violates RBI merchant acquiring guidelines.
- 5. Reconcile Invoice Totals: Match accounting software entries with bank credits using exact 12-digit UTR identifiers.
Related BharatBills Tools
Streamline your payment acceptance, billing, and accounting with our free business tools:
Sources & References
Put the principles from this guide into practice with our free calculators:
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