The Short Answer
The merchant pays UPI MDR. It is deducted from the merchant settlement, not charged to the customer. The customer always pays the full face value of the UPI transaction.
How the MDR Payment Chain Works
When a customer makes a UPI payment to a merchant:
- Customer sends ₹10,000 via UPI to the merchant
- The merchant bank (acquiring bank) receives the transaction
- The acquiring bank deducts applicable MDR from the settlement
- Net settlement (e.g., ₹9,960) is credited to the merchant
Does the Government Pay MDR on Behalf of Merchants?
Yes, partially. From 1 January 2020, the Government of India mandated zero MDR for UPI and RuPay transactions in the standard P2M category. To compensate banks and PSPs for the lost MDR revenue, the government set up a reimbursement scheme. This means banks are compensated, but merchants do not directly see zero MDR — the government funds the ecosystem.
Can Merchants Pass MDR to Customers?
Merchants are generally not permitted to add a surcharge to customer bills specifically to recover UPI MDR. UPI regulations intend for MDR to be a merchant-side cost. Verify current regulations with your acquiring bank before making any pricing adjustments.