Summary
A Merchant Discount Rate (MDR), a fee charged to merchants on each digital payment, will apply to UPI person-to-merchant transactions above ₹2,000 from October 15. Finance Ministry sources have told The Hindu that the MDR will still not cover the full cost of running UPI.
The government will therefore discuss with the Indian Banks' Association how much of the existing subsidy should continue and in what form. The standard rate is 0.4%, capped at ₹300 and fuel purchases above ₹2,000 attract a flat ₹5.
GST applies to the MDR, but any change to that rate is for the GST Council to decide. Petrol dealers have sought a waiver and there is no proposal to grant one.
WHY IN NEWS FOR UPSC & STATE PCS
With the MDR start date of October 15 approaching, Finance Ministry officials confirmed on September 25, 2026 that the date will not be delayed. They said talks will be held with the Indian Banks' Association on the subsidy and on preventing merchants from passing the charge on to customers and with traders' bodies on reassuring merchants.
The GST Council meets on October 7, but officials said that meeting is about process reforms rather than GST rates.
Standard News
From Free Utility to Shared Bill: UPI's New Charges Raise the Question of Who Pays
For six years, UPI has felt free to everyone who used it. It never was. Under the zero-MDR rule in force since January 2020, the cost of running UPI was carried by banks and payment firms and reimbursed partly by the government.
Payouts under the incentive scheme reached ₹3,631 crore in FY2023-24 alone. From October 15, part of that cost moves onto merchants. Yet officials admit the new charge will still not cover the full cost. UPI is not becoming commercial.
It is moving to a mixed funding model: the MDR on large merchant payments pays for part of the system and the taxpayer still pays for the rest. What matters now is who ends up bearing each part of the cost.
How the Charge Works in Practice
Take three merchants. An electronics shop makes a ₹10,000 UPI sale. The MDR is 0.4% or ₹40 and GST at 18% on that fee adds ₹7.20. The shop hands over ₹47.20, about 0.47% of the sale. The ₹300 cap only matters on sales above ₹75,000, so it protects big-ticket sellers, not ordinary shops. A kirana store selling ₹2,500 worth of monthly groceries pays ₹10, plus GST.
On thin grocery margins, the shopkeeper has three choices: absorb the cost, add a small surcharge or quietly steer customers towards cash for larger bills. The government's talks with the Indian Banks' Association are meant to stop the second option.
None of them can stop the third. A petrol pump pays a flat ₹5 on any fuel sale above ₹2,000. The problem is how dealers earn money. Their commission is fixed per litre, not as a percentage of the bill. So the ₹5 comes out of a fixed margin that does not grow with the size of the sale.
That is why the All India Petroleum Dealers Association wants an exemption and is using the MDR to argue for a review of dealer margins.
Who Ends Up Paying
In economics, tax incidence means who actually bears a charge, which is not necessarily who legally pays it. On paper, the merchant pays the MDR. In practice, it depends on how much margin and bargaining power each merchant has. Large retailers can absorb 0.47%. Small shops with thin margins and petrol dealers on fixed commissions are the ones likely to pass it on or cut back on digital payments.
The Subsidy Question Remains
₹2,000 crore is budgeted for FY2026-27. The talks with banks will decide whether it continues as a general subsidy or is targeted at low-value payments and small merchants. That choice will show what UPI is now meant to be: a public good that the government keeps paying for or a commercial service with public support at the edges.
For the exam: the question for Digital Public Infrastructure has shifted from how to get people to adopt it to how to pay for it once they have. The honest answer depends on who carries the cost.
Quick Facts
Key numbers & takeaways — revise these first
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UPI is operated by the National Payments Corporation of India (NPCI).
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A zero-MDR regime for UPI was mandated from January 2020.
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From October 15, 2026, UPI person-to-merchant payments above ₹2,000 will attract an MDR of 0.4%, capped at ₹300.
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Fuel purchases above ₹2,000 will attract a flat MDR of ₹5 instead of the 0.4% rate.
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The MDR is charged to merchants, not consumers.
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GST at 18% applies to the MDR as a charge for a financial service and any change is for the GST Council to decide.
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₹2,000 crore has been budgeted in FY2026-27 for the incentive scheme promoting RuPay debit cards and low-value BHIM-UPI transactions.
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Incentive payouts were ₹1,389 crore in FY2021-22, ₹2,210 crore in FY2022-23 and ₹3,631 crore in FY2023-24 (Department of Financial Services).
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The GST Council is chaired by the Union Finance Minister.
Connect the dots for your UPSC preparation.
Standard news covers the event. Log in to read our comprehensive analysis and uncover the hidden constitutional, structural, and ethical dimensions of this topic:
A worked breakdown of how 0.4% MDR plus 18% GST reaches electronics retailers, kirana stores and petrol pumps differently.
Why the ₹300 cap helps large sellers but not ordinary shops and what that means for the distribution of the cost.
The six-year subsidy history, from ₹1,389 crore to ₹3,631 crore and down again and what it shows about the true cost of UPI.
A roadmap for a mixed funding model that keeps UPI viable without pushing small merchants back to cash.
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