If you build fintech products, handle merchant payouts, or run a platform that processes UPI payments in India, the UPI MDR framework that kicks in October 15, 2026 affects your integration and your GST accounting.
What Changed
A 0.4% Merchant Discount Rate now applies to P2M (person-to-merchant) UPI transactions above Rs 2,000, capped at Rs 300 per transaction. The Ministry of Finance announced this September 15, 2026.
Key implementation points:
P2P transfers remain free. Your user-to-user transfer flows are unaffected.
P2M below Rs 2,000 remains free. No logic changes for small transactions.
Small merchants (P2PM category) under Rs 1 lakh/month stay at zero MDR. If you have a "small merchant" tier in your product, that segment is protected.
MDR is merchant-side only. There is no customer-facing charge to implement. Do not add a surcharge UI.
The GST Integration Point
The MDR is treated as a financial service. 18% GST applies on the MDR amount (not the transaction value).
transaction = Rs 5,000 MDR = 0.4% * 5,000 = Rs 20 GST on MDR = 18% * 20 = Rs 3.60 Total fee to merchant = Rs 23.60
For GST-registered merchants, this Rs 3.60 is ITC-eligible , but only if the merchant's GSTIN is linked in the payment aggregator's system so the charge flows to GSTR-2B.
API/integration checklist before Oct 15:
[ ] Confirm with your payment gateway that GSTIN registration is live on the merchant account
[ ] Verify MDR settlement line items will appear separately in payout reports (for GST reconciliation)
[ ] If you aggregate payments for sub-merchants, confirm each sub-merchant's GSTIN mapping
[ ] Update your invoicing module if you generate MDR-related settlement receipts to merchants
Special Categories
Railways, telecom, insurance, fuel and agricultural inputs get a flat Rs 5 per transaction instead of 0.4%. Capital market transactions (mutual funds, securities): 0.02% capped at Rs 300.
For these categories your product may need routing logic if you serve multiple merchant verticals.
Full breakdown: https://taxgarden.in/blog/upi-mdr-charges-above-2000-gst-itc-october-2026
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