Reconcile UPI from the transaction record through the provider’s settlement batch to the bank credit. Record a deduction as MDR only when the settlement detail, agreement, fee schedule or invoice supports that description; keep unexplained differences in a clearing or suspense account while you investigate them. As of 7 October 2026, official sources describe conflicting policy positions, and the announced framework scheduled for 15 October should not be treated as already in force.
What counts as a UPI MDR charge?
MDR is a merchant discount rate: a charge associated with accepting a payment. A deduction shown in a merchant dashboard is not automatically MDR. It could instead be a separately contracted payment-provider service fee, equipment rental or subscription, or another item. Identify the payee and stated fee type, then compare the deduction with the merchant agreement, settlement report and any invoice. The available official policy sources do not establish the charges or GST treatment applicable to a particular provider or business.
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Keep payment types distinct. The policy descriptions discussed below concern specified UPI person-to-merchant (P2M) payments; they do not establish a fee rule for every UPI transaction, P2P transfer or credit-linked payment. If the provider does not identify the payment category or deduction, ask for itemized settlement detail rather than assigning a policy category yourself.
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What the official sources say—and why the dates matter
The Income Tax Department’s explanation of Section 10A of the Payment and Settlement Systems Act says banks and system providers cannot impose charges on a payer or beneficiary using electronic modes prescribed under section 269SU. It lists RuPay debit card, BHIM-UPI and BHIM-UPI QR, and says Circular 32/2019 clarified that charges, including MDR, were not applicable to those prescribed modes from 1 January 2020.
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A Department of Financial Services FAQ dated 15 September 2026 describes a different framework scheduled to take effect on 15 October 2026. It says payments up to ₹2,000 are unaffected and describes a 0.4% rate for standard UPI P2M transactions above ₹2,000, capped at ₹300 for transactions of ₹75,000 and above. The FAQ also describes zero MDR for small merchants categorized P2PM who receive up to ₹1 lakh per month through UPI QR, along with special fee categories. The FAQ characterizes more than 95% of UPI P2M transaction volume as being at or below ₹2,000; that is the FAQ’s figure, not an independent calculation here.
A Government of India press release dated 8 August 2026 described a proposed amendment to Section 10A and said an NPCI-headed UPI and Services Steering Committee would decide MDR, if any, once Parliament passed the bill. A proposal announcement is not proof of enactment. As of 7 October 2026, the sources available for this article do not establish the bill’s passage, a Gazette notification, statutory amendment, RBI direction or NPCI circular implementing the later schedule. The Income Tax Department explanation and the later FAQ therefore need to be read with their dates and legal status in view: do not assume the FAQ’s scheduled terms are already operative law, or apply a post-effective-date MDR entry without checking the current official instrument and your provider’s terms.
Reconcile a UPI payment from sale to bank credit
- Export transaction-level records. Download the period’s UPI transactions from the merchant app, acquiring bank or payment aggregator. Preserve transaction/reference ID, date, gross amount, refund or reversal status, and payer or transaction type where supplied. Keep the original export.
- Match receipts to sales. Link each successful payment to its point-of-sale or e-commerce order and sales record. Separate pending, failed, reversed, refunded and duplicate rows. A failed or reversed payment is not an undisputed settled sale.
- Build the settlement-batch total. For each provider batch, total successful captured receipts, subtract documented refunds and reversals, and account for itemized deductions. Check cutoff times and documented settlement timing before treating a difference as a shortfall. Retain the batch ID and settlement date.
- Tie the batch to the bank statement. Match the provider’s net settlement to the bank credit by amount, date and reference. If one batch is split across credits, several batches are combined, or a credit is delayed, prepare a bridge schedule showing how the amounts connect rather than forcing a one-to-one match.
- Post supported amounts to the ledger. A workable clearing-account approach is to record sales and applicable taxes under the business’s accounting policy, hold the provider receivable in a payment-clearing account, then debit bank for the cash received and separately debit a supported fee expense when the batch settles. Credit the clearing account for the amount discharged by the settlement, including the documented deduction. Record refunds, chargebacks and any invoiced tax component separately as appropriate; have the business’s accountant confirm the treatment. This is workflow guidance, not a prescribed journal-entry format or tax advice.
- Investigate and close differences. Age unmatched items by batch. Ask the provider to explain unsupported deductions, a possible wrong merchant category, duplicate fees, reversals or timing differences. Retain corrected settlement detail or credit notes and attach the resolution and review date to the period reconciliation. Until an item is explained, leave it in clearing or suspense rather than calling it MDR.
Use a workpaper that preserves the audit trail
A reconciliation should let another reviewer follow a payment from the sale to the settlement and bank entry. A practical workpaper can include:
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- Sale or order ID and gross receipt
- Refund, reversal or chargeback amount and status
- Provider batch/reference and expected settlement date
- Actual bank-credit date, amount and bank reference
- Itemized deduction, stated fee type and supporting agreement or schedule
- Invoice number and tax amount, if invoiced
- Difference, investigation notes, resolution, reviewer and review date
This is a recommended workpaper, not a regulatory form. Preserve source exports, settlement reports, bank statements and invoices with the period file so that adjustments can be traced to supporting records.
How to assess a disputed deduction
Before approving a fee entry, compare the following details across the transaction record, provider report and contract:
| Check | What to verify |
|---|---|
| Payment type | Whether the record identifies UPI bank-account P2M, P2P or a credit-linked payment. Do not apply a P2M description to a different category without evidence. |
| Amount and threshold | Gross transaction value and the fee basis stated by the provider. For the proposed schedule described in the 15 September 2026 DFS FAQ, check the FAQ’s threshold and cap against the transaction, but do not treat that comparison alone as proof the fee is legally operative. |
| Merchant category | The provider’s merchant classification and any claimed exemption. The DFS FAQ describes a P2PM small-merchant condition tied to up to ₹1 lakh monthly UPI QR receipts; verify how the provider classified the business and confirm the operative rules. |
| Transaction and settlement dates | Distinguish the transaction date from the settlement date and from any stated implementation date. A batch may include transactions from different dates. |
| Fee description and payee | Determine whether the deduction is described as MDR or as a separately contracted service, rental, subscription or other charge. Check which entity charged it. |
| Settlement and tax documents | Match the deduction to itemized settlement detail and any contract or invoice. Do not infer tax treatment from the dashboard label alone. |
If a provider labels an item “MDR” but gives no transaction-level basis or applicable terms, request the fee calculation, category, effective date and supporting document. If the records instead show a contracted service fee, record it according to its actual documentation rather than silently relabeling it as MDR.
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