GST & Business Updates

UPI MDR from 15 October 2026: GST, ITC and Merchant Impact in Kerala

A practical guide to the 0.4% UPI merchant fee, the ₹2,000 and ₹1 lakh thresholds, GST on MDR, conditional input-tax credit and readiness steps for Kerala businesses.

NRS Editorial Desk · Published 2026-09-23 · 16 min read

A newspaper headline or social-media post saying that an 18% GST will apply to UPI payments above ₹2,000 leaves out the most important distinction. The customer is not charged 18% on the purchase. The new cost is a merchant-side Merchant Discount Rate, or MDR, on specified person-to-merchant payments; GST can apply to that processing fee. The difference changes a frightening ₹1,800 claim on a ₹10,000 sale into an estimated ₹7.20 of GST on a ₹40 MDR fee.

The date also matters. The Department of Financial Services FAQ was issued on 15 September 2026 and states that the finalized framework takes effect on 15 October 2026. This guide therefore describes a confirmed future-effective framework as at 23 September 2026. It does not tell a merchant to record MDR before the provider actually begins applying it under the final settlement terms.

UPI MDR rules from 15 October 2026 at a glance

The standard rate is applied to the full payment once the transaction crosses ₹2,000. It is not charged only on the excess. The official FAQ therefore calculates ₹12 on a ₹3,000 standard P2M payment: ₹3,000 × 0.4%, rather than ₹1,000 × 0.4%.

How much can MDR and GST deduct from a settlement?

The following illustrations assume a standard P2M merchant, an 18% GST invoice on the MDR service and no separate soundbox, gateway, subscription or other provider fee. They show the expected arithmetic, not a substitute for the actual merchant agreement, tax invoice and settlement statement.

This is why the phrase ‘18% GST on UPI above ₹2,000’ is misleading. On a ₹10,000 standard merchant payment, 0.4% MDR is ₹40. If GST at 18% is invoiced on that service, the GST is ₹7.20. The combined ₹47.20 is 0.472% of the payment before considering whether the merchant can claim eligible input-tax credit.

What remains free, and who should not panic

• Every permitted P2P transfer remains free regardless of value.
• A consumer does not pay MDR for scanning a merchant QR, and UPI apps cannot add a platform or hidden payment fee under the framework.
• All P2M payments up to and including ₹2,000 remain at zero MDR.
• An eligible P2PM merchant receiving up to ₹1 lakh per month through UPI QR remains at zero MDR even if one payment exceeds ₹2,000.
• The Ministry of Finance estimates that about 96% of merchant transactions remain unaffected because of the transaction threshold and small-merchant protection.
• UPI AutoPay or recurring mandates are described in the official FAQ as outside the prescribed MDR charge.

MDR is not a government tax and is not collected by NPCI as government revenue. The Ministry describes it as a payment-ecosystem charge distributed among participants such as banks and payment application providers. GST is a separate tax consequence on the supply of that payment-processing service.

The ₹1 lakh P2PM exemption: what small merchants must verify

P2PM means Person-to-Person-Merchant. It is an account and transaction category used for smaller or informal merchants receiving UPI QR payments directly into the relevant account. The new framework protects a P2PM merchant receiving up to ₹1 lakh per month through UPI QR. GST registration is not required merely to obtain this payment-category protection.

The exemption is not established by calling the business a small shop, using a personal-looking QR, or keeping each individual bill below ₹2,000. The official FAQ says acquiring banks and payment service providers monitor inward UPI collections. If those receipts exceed ₹1 lakh per month for three consecutive months, the merchant is formally transitioned to the P2M category.

• Ask the acquiring bank or payment provider to confirm the present category as P2PM or P2M in writing or in the merchant dashboard.
• Confirm which UPI credits count toward the ₹1 lakh monthly monitoring threshold and the date on which a category change would take effect.
• Do not split genuine business collections across personal QRs to avoid classification or accounting. That can weaken the sales trail, bank reconciliation and compliance record.
• If monthly UPI receipts are approaching ₹1 lakh, forecast the cost of moving to P2M rather than waiting for an unexplained settlement deduction.

Can a merchant claim input-tax credit on GST charged on MDR?

A regular GST-registered merchant may be able to claim the GST invoiced on MDR as input-tax credit when the payment service is used in the course or furtherance of business and every applicable condition is satisfied. Section 16 of the CGST Act requires more than a bank deduction: the merchant needs the prescribed tax invoice or debit note, receipt of the service, communication of invoice details through the prescribed system, payment of tax by the supplier and filing of the return, along with the other statutory conditions.

Section 17 can restrict or require apportionment of credit where the service relates partly to non-business use or exempt supplies, and blocked-credit or reversal rules can also matter. An unregistered merchant cannot claim ITC. A composition taxpayer generally cannot claim ITC. A regular taxpayer whose supplier invoice carries the wrong GSTIN, does not reach the applicable statement, or fails another condition should not describe the credit as automatic.

A practical accounting example for a ₹10,000 sale

Assume a standard P2M merchant sells goods for ₹10,000 and the provider settles ₹9,952.80 after ₹40 MDR and ₹7.20 GST on that fee. The books should not record sales at the net bank receipt. They should preserve the ₹10,000 gross customer sale, record ₹40 as the payment-processing or bank-charge expense, record ₹7.20 as eligible input GST only when the credit conditions are met, and reconcile the ₹9,952.80 bank settlement.

If the invoice is an intra-State supply of service, the tax may be split between CGST and SGST; an inter-State invoice may carry IGST. The provider invoice and place-of-supply treatment determine the actual entries. Where ITC is unavailable, the GST amount should be included in the relevant expense instead of being parked indefinitely as recoverable credit.

Special rates: fuel, insurance, utilities and capital markets

The 0.4% standard rate is not the only rate in the framework. The official FAQ assigns a flat ₹5 MDR for transactions above ₹2,000 in designated industry-program categories such as railways, telecom, insurance, fuel and specified utilities. Capital-market transactions, including mutual funds and specified securities activity, use 0.02% with a ₹300 cap.

A merchant should not select a favourable category for itself. The acquiring bank or provider uses merchant-category and onboarding data. A fuel outlet, education institution, utility counter or other specialised merchant should verify its coding and the provider's implementation before relying on the flat-rate treatment. The official FAQ describes education payments as receiving a flat-fee or capped structure but does not state one universal education rate in the text; the provider's category schedule therefore matters.

Why older ‘no GST on UPI’ articles now need a date label

In April 2025, the Ministry of Finance correctly rejected reports of GST on UPI payments above ₹2,000. At that time, P2M UPI had zero MDR, so there was no MDR fee on which GST could arise. That clarification also explained the underlying principle: GST applies to payment charges such as MDR, not to the transferred amount merely because UPI was used.

The legal and commercial setting changed during 2026. An August announcement described the enabling amendment and a future limited merchant MDR. A 14 September notification retained zero MDR up to ₹2,000, and the 15 September framework and FAQ set the rates and 15 October effective date. Quoting the 2025 denial without this timeline produces an outdated answer even though the old statement was accurate when issued.

Kerala merchant checklist before the effective date

Kerala does not have a separate UPI MDR or GST rate. The local value is operational: retailers in Calicut, service businesses in Manjeri and merchants across Malappuram district need their payment-provider records, GST profile and accounting process to agree before the first charged settlements arrive.

• Inventory every merchant QR, payment gateway, soundbox and acquiring-bank arrangement used by the business.
• Confirm whether each arrangement is P2M, P2PM, UPI AutoPay, credit-linked UPI or another payment product governed by separate terms.
• Ask for the applicable MDR schedule, ₹300 cap, merchant category, GST invoicing method and implementation date.
• Ensure the provider holds the correct legal name, PAN, GSTIN, address and e-mail for tax invoices.
• Test how the settlement report exposes gross payment, refund, MDR, GST, other fees and net bank credit.
• Create separate ledgers for UPI MDR and GST on payment-processing charges; do not reduce sales directly to the net settlement.
• Reconcile the provider invoice with GSTR-2B and Section 16/17 conditions before claiming ITC.
• Estimate monthly cost using the number and value of payments above ₹2,000, rather than total UPI turnover alone.
• Review refunds, reversals and failed payments so the business knows whether and when MDR and GST are reversed.
• Train cashiers not to add a UPI surcharge to the customer's displayed price and give management a route for settlement exceptions.

Questions to send to your bank or payment provider

• Is this merchant ID classified as P2M or P2PM on 15 October 2026?
• If P2PM, which inward credits count toward the ₹1 lakh monthly threshold, and how will a three-month breach be communicated?
• Which MDR rate and cap apply to our merchant category code?
• Will MDR be deducted per transaction or through a periodic invoice and settlement adjustment?
• Will the GST invoice contain our correct GSTIN and appear under the appropriate return-reporting process?
• How are refunds, partial refunds, reversals, chargebacks and failed settlements treated for MDR and GST?
• Are soundbox, gateway, subscription or other service fees separate from the new MDR?
• Where can we download the transaction-level reconciliation and tax invoice?

What NRS can review for a Kerala business

NRS and Associates can review the accounting and GST side of the change: provider invoices, GSTIN mapping, settlement-to-sales reconciliation, ledger design, ITC conditions, mixed-supply implications and exception reporting. The physical offices are in Manjeri and Calicut; businesses elsewhere in Malappuram district can coordinate through the Manjeri office.

The payment provider or acquiring bank remains responsible for merchant classification, MDR billing and the operational settlement file. A CA review should use those records rather than promise a P2PM exemption, a particular category code or automatic input-tax credit before the evidence is available.

Frequently asked questions about UPI MDR and GST

Does every UPI payment above ₹2,000 attract 18% GST?

No. GST is not charged at 18% on the payment value. From 15 October 2026, specified P2M payments above ₹2,000 can attract MDR; GST may then be invoiced on that MDR fee. For a standard ₹10,000 P2M payment, the MDR is ₹40 and 18% GST on that fee would be ₹7.20, not ₹1,800.

When do the new UPI MDR charges start?

The official Department of Financial Services and NPCI FAQ states that the finalized framework takes effect on 15 October 2026. Until that effective date, merchants should use the existing settlement terms and prepare their systems for the change.

Do customers have to pay UPI MDR?

No. The official framework keeps UPI free for consumers. Merchants cannot pass the MDR to customers while accepting UPI payments, and UPI apps cannot impose a platform fee or hidden payment charge on the consumer.

Are person-to-person UPI transfers still free?

Yes. P2P transfers remain free regardless of the permitted amount. The new MDR applies to specified person-to-merchant transactions, not transfers between individuals.

Is UPI MDR charged on a ₹2,000 payment?

No. The zero-MDR rule covers merchant payments up to and including ₹2,000. The standard 0.4% rate begins only when an applicable P2M transaction is above ₹2,000.

Is MDR calculated only on the amount above ₹2,000?

No. For an applicable standard P2M payment above ₹2,000, the 0.4% rate is calculated on the full transaction value. The official example gives ₹12 MDR on a ₹3,000 payment, which is 0.4% of ₹3,000.

Which small merchants continue to get zero MDR?

A merchant onboarded in the P2PM category and receiving up to ₹1 lakh per month through UPI QR into the relevant account continues to receive zero-MDR protection, including for an individual payment above ₹2,000. The merchant should confirm its category with the acquiring bank or payment provider.

What happens when P2PM receipts exceed ₹1 lakh per month?

The official FAQ says providers monitor the monthly inward-UPI threshold. A merchant whose inward UPI receipts exceed ₹1 lakh per month for three consecutive months is transitioned from P2PM to P2M. The provider should confirm the classification and effective billing date.

Does a small merchant need GST registration for the P2PM exemption?

No. The official FAQ states that GST registration is not a condition for P2PM zero-MDR protection. The payment category and monthly UPI collections determine that protection; ordinary GST registration rules remain a separate question.

Can a GST-registered merchant claim ITC on GST charged on MDR?

Possibly, but it is not automatic. The merchant must satisfy the CGST Act conditions, including a valid tax invoice, receipt and business use of the service, communication of invoice details through the prescribed system, tax payment by the supplier and return filing. Section 17 restrictions and reversals can also apply.

Can a composition taxpayer claim ITC on the MDR invoice?

No. A person paying tax under the composition scheme is generally not entitled to input-tax credit. GST charged on the MDR therefore becomes a cost to that business unless another specific rule applies.

Does an entry in GSTR-2B guarantee ITC?

No. GSTR-2B is an important reconciliation record, but appearance alone does not override the other Section 16 and Section 17 conditions. The merchant should also verify the invoice, GSTIN, business use, payment and any required reversal or apportionment.

What is the maximum standard UPI MDR per transaction?

For standard P2M payments, the official framework applies 0.4% above ₹2,000 and fixes MDR at ₹300 for a payment of ₹75,000 or more. GST on the service fee, if invoiced, is additional to that MDR amount.

Do fuel, insurance and utility payments use the 0.4% rate?

Not under the designated industry-program treatment described in the official FAQ. Railways, telecom, insurance, fuel and specified utilities use a flat ₹5 MDR for transactions above ₹2,000. The provider's merchant-category coding should be verified.

What should a Kerala merchant check before 15 October 2026?

Ask the acquiring bank or payment provider to confirm P2M or P2PM classification, merchant category, MDR rate, GST invoice process and settlement-report fields. Then map gross sales, MDR, GST and net settlement in the accounts and test the October reconciliation before returns are prepared.