Are UPI Transactions Chargeable? Know the Latest Rules

Are UPI payments going to become chargeable? This question has raised concerns among customers and merchants across India. Many people want to know whether they will have to pay additional charges when making or receiving payments through the Unified Payments Interface (UPI).

The key distinction is between charges imposed on customers and the Merchant Discount Rate (MDR) that may apply to eligible merchant transactions. MDR is a merchant-side payment-processing fee and does not automatically mean that customers must pay an additional charge for using UPI.

The reported changes to the UPI MDR framework require merchants to review their payment-processing arrangements, accounting practices and settlement statements. However, the proposed rates and implementation date should be verified against the latest official notifications before being treated as effective.

What Is Chargeable Under the UPI MDR Framework?

The Merchant Discount Rate (MDR) is a fee charged to a merchant for accepting and processing certain payment transactions. It is distinct from a customer transaction fee.

Under the reported UPI MDR framework, the key provisions include:

• Person-to-person (P2P) payments: Transfers between individuals remain outside the scope of merchant MDR.
• Merchant payments up to ₹2,000: These are reported to remain exempt from MDR under the proposed framework.
• Specified merchant payments above ₹2,000: An MDR of 0.4% has been reported for eligible transaction categories, subject to the applicable conditions.
• High-value transactions: A cap of ₹300 per transaction has been reported for transactions of ₹75,000 or more.
• Specified merchant categories: Categories such as railways, telecommunications, insurance and fuel have been reported to attract a flat MDR of ₹5 for qualifying transactions above ₹2,000.
• Eligible small merchants: Qualifying merchants may continue to benefit from zero-MDR provisions, subject to the applicable rules.

These rates, thresholds and exemptions should be confirmed against the relevant official notification or circular before publication.

Importantly, the ₹2,000 threshold is not a general limit on UPI payments. Customers may make payments exceeding this amount, subject to the applicable bank, UPI app and transaction limits. The threshold relates to the reported MDR framework for specified merchant transactions.

Who Pays the MDR Charge?

MDR is a merchant-side charge. Depending on the applicable rules and the agreement with the acquiring bank or payment aggregator, the fee may be deducted from the settlement amount or billed separately to the merchant.

Customers should not automatically be charged an additional fee simply because they choose UPI as their payment method. Merchants should verify the applicable legal and contractual restrictions before attempting to recover payment-processing charges from customers.

Example: MDR on a Merchant Transaction

Suppose a customer purchases goods worth ₹50,000 from a merchant in a category subject to a 0.4% MDR.

The calculation would be:

• Value of goods: ₹50,000
• Assumed MDR rate: 0.4%
• MDR amount: ₹200
• Net settlement before any other applicable adjustments: ₹49,800

The customer pays ₹50,000 for the goods. The merchant receives the settlement amount after the applicable processing fee is deducted, assuming the fee is calculated on the full transaction value and no other deductions apply.

Merchants should review their agreements with acquiring banks or payment aggregators to understand the applicable merchant category, fee calculation, settlement cycle and invoicing arrangements.

GST and Accounting Implications

The use of UPI as a payment method does not, by itself, attract GST on the transfer of money. GST is determined by the nature and taxability of the underlying supply of goods or services.

The following points are important for businesses.

1. GST on the underlying sale

Where a registered merchant makes a taxable supply, GST must be charged and reported in accordance with the applicable provisions. The customer’s choice to pay through UPI does not, by itself, change the GST treatment of the sale.

For example, if a merchant makes a taxable supply worth ₹10,000, the applicable GST treatment will depend on the nature of the supply and the relevant tax rules—not on the use of UPI.

2. GST on payment-processing fees

A payment aggregator or another service provider may charge separate fees for payment processing or related services. GST may apply to these fees, subject to the applicable provisions and exemptions.

A GST-registered merchant may claim input tax credit (ITC) on eligible GST charged on such services, provided the statutory conditions are satisfied and the required documentation is available.

3. Accounting treatment of MDR

Businesses should generally record sales at the gross invoice value and account for payment-processing charges separately.

For example, if a merchant records a sale of ₹10,000 and the payment provider deducts an MDR of ₹40, the accounting treatment would generally be:

• Sales revenue: ₹10,000
• Payment-processing expense: ₹40
• Net bank settlement: ₹9,960

The example assumes that ₹40 is the processing fee before any applicable GST on that fee. GST charged on the processing service should be recorded separately, with ITC claimed only where eligible.

What Should Businesses Do?

Businesses accepting UPI payments should take the following steps to maintain accurate financial records and ensure compliance:

• Verify the applicable MDR: Confirm the merchant category, applicable fee and exemptions with the acquiring bank or payment aggregator.
• Review settlement statements: Check MDR deductions, refunds, chargebacks, failed transactions and other adjustments.
• Reconcile transaction records: Match UPI transaction references with sales invoices, payment-provider settlement reports and bank credits.
• Reconcile GST returns: Ensure that sales and taxable turnover recorded in the books are consistent with the relevant GST returns, including GSTR-1 and GSTR-3B, where applicable.
• Maintain supporting documentation: Preserve invoices, settlement reports, fee statements and other relevant records.

Businesses should record sales at the appropriate gross invoice value and account for MDR and any related GST separately.

They should also avoid treating every UPI-related bank credit as a sale. Loans, capital contributions, transfers between own accounts, reimbursements and other non-sales receipts must be classified according to their actual nature.

Merchants should not impose an MDR surcharge on customers without verifying that such a charge is legally permitted under the applicable rules and contractual arrangements.

Conclusion

The introduction of an MDR framework for specified merchant transactions does not mean that all UPI payments automatically become chargeable to customers. The distinction between customer transaction fees and merchant-side processing charges is essential.

The reported framework includes an MDR rate of 0.4% for specified transactions above ₹2,000, along with a reported ₹300 cap for certain high-value transactions. However, businesses should confirm the final rates, exemptions and effective date through official notifications before relying on these provisions.

Merchants should review their payment-processing agreements, reconcile settlement statements and maintain accurate accounting records to minimise compliance risks.

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