Overview of UPI MDR
UPI MDR (Merchant Discount Rate) is a fee structure that governs charges on UPI-based payment transactions. MDR is the compensation paid to the ecosystem (acquiring banks, payment service providers, NPCI) for processing merchant payments. The Indian government has progressively rationalised UPI MDR to encourage digital payments.
A key point often misunderstood: MDR is borne by the merchant, not the customer. The customer always pays the full transaction value. MDR is deducted from the merchant's settlement amount.
Current UPI MDR Framework
1. Standard P2M Transactions (Person-to-Merchant)
For general merchant UPI payments (retail, e-commerce, restaurants, services, etc.):
| Transaction Amount | MDR Rate | Cap | Notes |
|---|---|---|---|
| Up to ₹2,000 | ₹0 (Zero MDR) | — | Zero MDR for all eligible P2M below ₹2,000 |
| Above ₹2,000 up to ₹75,000 | 0.4% of amount | ₹300 | MDR = amount × 0.004 |
| Above ₹75,000 | ₹300 (Capped) | ₹300 | Cap applies from ₹75,000 onwards (0.4% × ₹75,000 = ₹300) |
(Only applies if Transaction Amount > ₹2,000)
2. Essential / Thin-Margin Sectors
Certain sectors with thin margins and high transaction volumes receive preferential MDR treatment. These include:
- Petrol pumps and fuel stations
- Fertiliser and agricultural input dealers
- Insurance premium payments
- Telecom operators and recharges
- Railway bookings (IRCTC, Indian Railways)
- Utility bill payments
- Education fee payments
| Amount | MDR | Notes |
|---|---|---|
| Up to ₹2,000 | ₹0 | Zero MDR |
| Above ₹2,000 | ₹5 flat | Flat ₹5 per transaction regardless of amount |
3. Capital Market Transactions
Transactions related to stock markets, mutual funds, AMCs and securities trading:
| Amount | MDR Rate | Cap |
|---|---|---|
| Any amount | 0.02% of amount | ₹300 per transaction |
4. Small Merchant / Zero-MDR Categories
Small merchants — including kirana shops, street vendors and micro-merchants — may qualify for zero-MDR treatment under the government's framework for encouraging small business digital adoption. These merchants typically have lower annual turnover thresholds and accept UPI payments via QR codes.
5. P2P (Person-to-Person) Transfers
UPI transfers between individuals (friends, family, personal payments) do not attract any MDR. This applies to all P2P UPI transactions regardless of amount.
GST on UPI MDR
Where MDR applies, GST at 18% is levied on the MDR amount — not on the full transaction value.
(Applied on the MDR amount only, not on the transaction value)
Example: On a ₹10,000 standard merchant transaction:
- MDR = ₹10,000 × 0.4% = ₹40
- GST on MDR = ₹40 × 18% = ₹7.20
- Total deduction = ₹47.20
- Merchant settlement = ₹9,952.80
Who Bears the MDR?
Under the Indian UPI framework:
- MDR is borne by the merchant, not the customer
- The customer always pays the full face value of the transaction
- MDR is deducted from the merchant's settlement amount by the acquiring bank/PSP
- Merchants should not add a surcharge to customer payments to recover MDR without verifying applicable regulations
Historical Context
UPI MDR has been progressively rationalised:
- 2020: Government of India announced zero MDR for UPI and RuPay transactions from 1 January 2020 for most standard merchant categories. Banks were compensated through a government scheme.
- 2022: NPCI rationalised the MDR framework for certain categories (essential sector, capital markets) through updated circulars.
- The framework continues to be updated to balance merchant adoption with ecosystem sustainability.