This is not a tax, cess, surcharge...: FM Sitharaman explains what the new UPI MDR really means

Finance Minister Nirmala Sitharaman has sought to clear the confusion around the new Merchant Discount Rate (MDR) on specified UPI transactions, stressing that the charge is not a tax, cess or surcharge and will not accrue to the government.

Speaking to PTI, Sitharaman said, “This is not a tax, this is not a cess, and it is not even a surcharge. The collection is not going to the Consolidated Fund of India.”

Where will the MDR money go?

Under the new framework, a 0.4% MDR will apply from October 15 to specified person-to-merchant UPI transactions above Rs 2,000. The charge will be borne by merchants rather than customers, according to the framework.

Sitharaman said the money collected will remain within the payments ecosystem and be distributed among entities involved in processing digital payments.

According to details cited by PTI, 40% of the MDR will go to the customer’s bank, 30% to payment gateways, 20% to the UPI application and 10% to the sponsoring bank of the UPI app.

“The merchant is the one who is going to pay. That money is not coming to the Government of India and we are not imposing it. And this will not be passed on to the customer,” Sitharaman told PTI.

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Not every UPI payment will attract MDR

The new framework does not introduce a charge on all UPI transactions. Person-to-person payments will remain free irrespective of value, while person-to-merchant payments of up to Rs 2,000 will also remain outside the MDR framework.

For specified merchant transactions above Rs 2,000, the standard MDR will be 0.4%. For transactions of Rs 75,000 and above, the charge will be capped at Rs 300, according to the Finance Ministry framework cited by PTI.

Small merchants receiving up to Rs 1 lakh a month through UPI QR codes under the P2PM category will continue to receive zero-MDR treatment. The ministry estimates that around 96% of UPI merchant transactions will remain outside the MDR framework.

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Sitharaman compares it with card payments

Sitharaman also compared the new arrangement with MDR already paid by merchants when customers use debit and credit cards.

“If you purchase an item worth Rs 5,000, the bill reflects that exact amount plus GST, of course, but the MDR is not added to it,” she told PTI.

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She said merchants and payment providers already manage such charges among themselves for card transactions, and the same principle would apply to UPI MDR.

The framework also provides for different rates for certain categories. Essential services such as railways, telecom, fuel and insurance will attract a flat Rs 5 MDR on transactions above Rs 2,000, while transactions involving mutual funds, securities, brokers and dealers will attract an MDR of 0.02%, capped at Rs 300.

The new structure therefore creates a revenue mechanism for participants in the UPI ecosystem while retaining free person-to-person payments and shielding customers from a separate MDR charge.

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