There are no free lunches in this world. India’s businesses just found out the one they’d been eating for years had a bill attached all along.
For years, UPI has been treated by businesses as a payment channel with virtually no direct merchant cost. The proposed MDR framework changes that assumption. More importantly, the change is not confined to payment costs it creates consequences for accounting, GST, reconciliation, pricing and internal controls.
Since, parliament has given accent to the Taxation and Other Laws (Amendment) Bill, thus from October 15, 2026, there will be levy of merchant discount rate charges (MDR Charges) on UPI payments on transactions above the prescribed threshold limit.
For an industry built on the promise of “free,” that single decimal point affects business’s economics. The MDR fees of 0.4% as proposed by Government of India will be levied by the NPCI on the amount to be credited to the merchant, directly impacting the books of accounts of the merchant.
From October 15, the finance and Accounting team will have to add a new head to the chart of accounts, prepare sales reconciliation, and will have to account for GST input tax credit.
The accounting story is where it gets interesting, and where most of the coverage so far has stopped short. Before getting to the books, though, it’s worth understanding why zero-MDR ends now rather than at some other time because the mechanism the Government used to open this door says something about how much room it’s kept to redraw the line again.
The Legal Mechanism
The zero-MDR mandate was never a commercial choice it was a statutory bar under Section 10A of the Payment and Settlement System Act, 2007 which prohibited any charge on payments made through the electronic modes prescribed under Section 269SU of the Income-tax Act, 1961 (UPI and RuPay debit cards among them).
However, the Taxation and Other Laws (Amendment) Act, 2026 has removed the blanket statutory protection into a notification-dependent one. Zero-charge protection now applies only to whatever electronic payment modes the Central Government chooses to notify. A mode the Government does not notify simply falls outside the bar, and the ordinary commercial freedom to price a service applies.
On 14 September 2026, the Government exercised that power and notified UPI transactions up to ₹2,000 transactions as protected.
What attracts MDR ?
General P2M transactions above ₹2,000: 0.4% MDR, shared among issuing/remitter bank, acquiring bank, payment service provider and UPI app, capped at ₹300 for transactions of ₹75,000 and above.
- Essential/thin-margin sectors (railways, telecom, insurance, fuel, agricultural inputs): a flat ₹5 per transaction above ₹2,000, giving cost certainty rather than a percentage exposure.
- Capital-market transactions (mutual funds, securities, stockbrokers, dealers): 0.02%, capped at ₹300.
- Small merchants: those receiving under ₹1 lakh a month through UPI QR codes remain fully exempt from the new charge, keeping kirana-scale acceptance untouched while pulling in higher-volume merchants.
It has been stated that the merchant has to bear the cost of MDR charge, and customers do not pay this. Banks have been directed to ensure merchants don’t pass MDR through, and UPI app providers are barred from levying platform fees or hidden charges. This is a cost inside the merchant payment ecosystem which is precisely why it has to be absorbed in the books, not billed separately.
However, increasing the cost for merchant will rise the rate for the goods or service, stating MDR a non transferable charge is effectively hold zero value.
Accounting Treatment: Where the Money Actually Goes
Because the merchant cannot invoice MDR separately to the customer, it has to be built into cost of sales or booked as an indirect expense not shown as a deduction from sales revenue.
Example: A merchant sells goods worth ₹10,000, taxed at 18% GST, invoice value ₹11,800, paid via an eligible UPI transaction.
| Particulars | Amount (₹) |
| Invoice value received via UPI | 11,800.00 |
| MDR @ 0.4% | (47.20) |
| GST @ 18% on MDR | (8.49) |
| Net credit to merchant’s bank account | 11,744.31 |
In percentage terms, the merchant gives up roughly 0.48% of the transaction value (0.4% MDR plus GST on that MDR) small in isolation, but on high-volume, thin-margin businesses, a recurring leak that compounds across thousands of transactions a month.
Suggested journal entries:
| Particulars | Dr | Cr |
| Bank A/c | 11,744.31 | |
| MDR Expense A/c (new indirect expense head) | 47.20 | |
| Input GST on MDR A/c | 8.49 | |
| To Sales A/c | 10,000.00 | |
| To Output GST A/c | 1,800.00 |
This means two changes to the accounting system before 15 October:
- (1) a new chart-of-accounts head an indirect expense ledger for MDR and
- (2) a process to book that expense simultaneously with every UPI receipt above ₹2,000, rather than net it off silently against revenue.
Most POS/accounting software will need a rule change here; reconciliation teams should not be manually adjusting this transaction by transaction.
The merchant will separately receive an invoice from the UPI ecosystem participant (routed via the beneficiary/acquiring bank) for the MDR service fee and the GST on it.
A GST-registered business, once it satisfies the conditions under Section 16 of the CGST Act – a valid tax invoice, receipt of service, GST actually paid by the supplier and return filed, and payment made to the vendor can claim input tax credit on that GST.
But ITC eligibility is not instantaneous: it depends on the counterparty’s compliance (GSTR-2B matching) and on payment being made within the statutory window, which means a temporary working-capital block between the deduction and the credit being available to set off.
Where the Full Cost Becomes Burden
For businesses dealing in GST-exempt goods or services, or registered under the composition scheme, there is no ITC to claim. The entire MDR and the GST on it becomes a straight cost, with no offsetting credit this group absorbs the charge in full, and it should be modelled as a direct margin hit, not a pass-through compliance item.
Refunds: An Open Question, With a Likely Answer
If a customer pays via UPI and later seeks a refund, MDR has already been deducted on the original inflow. Whether MDR is deducted again on the refund leg effectively taxing the same transaction twice is not yet settled by the framework.
Card-network practice offers a reasonable precedent: MDR is typically not refunded to the merchant when a sale is reversed, meaning the merchant bears the original MDR cost even on a cancelled sale, and a second charge on the refund transfer itself would be an additional cost layered on top.
Given the Government’s position that merchants bear the MDR cost, businesses with high return rates (electronics, apparel, e-commerce) should plan for the worst case MDR absorbed on both legs until NPCI or the banks clarify treatment, and build this into pricing or refund-policy assumptions now rather than after the fact.
Who Gets Hit Hardest
The businesses most exposed are those taking instant, direct payment from end consumers – hospitals, electronics retailers, medical stores, restaurants, and similar high-ticket, walk-in businesses where UPI is the default payment rail and transaction values routinely cross ₹2,000. Whereas, formal B2B businesses are comparatively insulated: they typically settle through NEFT/IMPS/RTGS for vendor and institutional payments precisely because those channels preserve a documented audit trail, and those rails sit outside this MDR framework entirely.
In other words, the dividing line isn’t business size it’s payment channel and average ticket size.
The ₹1 lakh/month small-merchant exemption pulls the smallest UPI-QR acceptors out of this analysis altogether, which narrows the real-world impact to mid-size and larger merchants transacting at volume – exactly the segment that should be updating its accounting systems before the October cutover.
A Live Legal Overhang
Before finance teams treat this as settled, it’s worth noting that a PIL has been filed in the Supreme Court challenging the Finance Ministry’s 14 September notification and the amended Section 10A itself, in the case of Anjan Datta vs. Union of India & Ors. arguing that “…the framework itself acknowledges that the merchant must bear a charge on each qualifying receipt. For low-margin traders, service providers and digitally dependent businesses, that cost necessarily enters the price structure, reduces working capital, or induces refusal of UPI and splitting of transactions. A bare direction against an expressly recognised economic consequence does not eliminate the burden,”
Further, it was argued that “A transaction of ₹2,001 attracts a percentage charge while one of ₹2,000 does not; a merchant may lose protection by crossing a monthly aggregate boundary unrelated to margin, turnover, geography or ability to bear the fee; and the framework grants a proportionately larger benefit to very high-value transactions through the cap. These cliffs are capable of distorting behaviour and discriminating between similarly situated merchants”.
It will be interesting to see judiciary’s view on the levy of MDR charges, but the finance and accounting team must tighten their belt to accommodate the MDR charges in the books of accounts and for statutory compliances.
Action Checklist for Finance Teams
- Add a dedicated MDR expense ledger and an input-GST-on-MDR ledger to the chart of accounts.
- Configure billing/POS systems to auto-book MDR and GST-on-MDR against every eligible UPI receipt above ₹2,000, rather than netting silently.
- Build a vendor-invoice tracking process for MDR bills from the acquiring/beneficiary bank, so ITC claims aren’t missed and Section 16 conditions are monitored.
- For composition-scheme or exempt-supply businesses, re-model margins to absorb MDR as a direct cost with no offsetting credit.
- Decide a refund policy assumption now treat MDR as non-recoverable on the original sale, and budget for possible re-deduction on the refund leg until clarified.
- Track the Supreme Court proceeding, but don’t defer system changes pending its outcome the framework is live from 15 October regardless.
DISCLAIMER: The views expressed are strictly of Mr. Pradyuman Joshi. The contents of this article are solely for informational purpose and for the reader’s personal non-commercial use. It does not constitute professional advice or recommendation. The author does not accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon. Further, no portion of our article or newsletter should be used for any purpose(s) unless authorized in writing and we reserve a legal right for any infringement on usage of our article or newsletter without prior permission.
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