For an ordinary bank-account UPI payment, MDR is not chargeable. NPCI states that bank-account-to-bank-account UPI is free for both customers and merchants, while the Income Tax Department says charges including MDR do not apply to prescribed electronic modes from 1 January 2020. A PPI-wallet payment made through interoperable UPI follows a different interchange arrangement, but NPCI says that interchange is not charged to the customer.
What MDR means in a UPI transaction
MDR means merchant discount rate. It is a payment-acceptance charge associated with processing a merchant’s digital transaction. The term describes a cost on the payment-acceptance side; it does not mean that every transaction using a UPI app automatically carries a fee.
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The funding source and payment path matter. A customer can scan a QR code with a bank account, pay from a prepaid payment instrument (PPI) wallet, or use a card through a payment interface. Those are not legally or commercially identical transactions.
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The no-MDR rule for bank-account UPI
What the government clarified
CBDT Circular No. 16/2020, issued by the Ministry of Finance on 30 August 2020, says: “any charge including the MDR (Merchant Discount Rate) shall not be applicable on or after 01st January, 2020 on payment made through prescribed electronic modes.” UPI and UPI QR (BHIM-UPI and BHIM-UPI QR Code) are among the prescribed modes identified in the applicable rules.
That clarification means a normal bank-account UPI payment should not produce an MDR surcharge on the customer’s bill, and the merchant should not be assessed MDR for that UPI transaction under the described rule. NPCI separately describes bank-account-to-bank-account UPI as free for both customers and merchants.
Who is legally barred from imposing the charge?
Section 10A of the Payment and Settlement Systems Act says that a bank or system provider must not impose a charge, directly or indirectly, on a person making or receiving a payment through modes prescribed under section 269SU of the Income-tax Act. CBDT’s August 2020 circular explains that charging users for UPI transactions in this context breaches section 10A.
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The statutory wording is important. It names banks and system providers and addresses charges imposed on people making or receiving a payment through the prescribed modes. It should not be expanded into a claim that every possible price a business sets for an unrelated service is automatically governed by the same provision.
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Which UPI payment path are you using?
Before deciding whether a fee is MDR, identify the instrument that funded the payment. The following distinctions reflect the official material available for this explanation.
| Payment path | What the official position says | What it means at checkout |
|---|---|---|
| Bank account to bank account through UPI | NPCI says these transactions remain free for customers and merchants. | A merchant should not add an MDR line or surcharge for the prescribed UPI payment. |
| UPI QR payment using a prescribed UPI mode | The government identifies UPI QR as a prescribed mode and says no charge, including MDR, applies from 1 January 2020. | Scanning a qualifying UPI QR should not make the bill higher because of MDR. |
| PPI wallet used for a merchant payment through interoperable UPI | NPCI says interchange applies to PPI merchant transactions, says the customer is not charged, and distinguishes them from bank-account UPI. | Do not assume a merchant-side interchange arrangement is a customer fee or that it applies to every UPI payment. |
| Debit, credit or prepaid card payment | RBI’s cited direction addresses unbundling card MDR. The UPI no-MDR guidance is not a universal card rule. | Apply the current card-specific terms, not the bank-account UPI rule. |
When can a merchant charge MDR on UPI?
Prescribed bank-account UPI: no general MDR charge
For the prescribed UPI modes, the government clarification fixes the no-MDR position from 1 January 2020. A merchant cannot treat the ordinary bank-account UPI payment as a card transaction simply because the customer used a phone or a QR code.
PPI-wallet UPI: a separate interchange arrangement
NPCI’s 29 March 2023 release says interchange is applicable only to PPI merchant transactions. It also says there is no charge to the customer and that bank-account-to-bank-account transactions remain free. This is a merchant-side arrangement connected to the PPI payment path, not a statement that all UPI payments have MDR.
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The official material used here does not establish a current interchange percentage, so no rate should be quoted as though it were universal or current for every wallet, merchant category or date.
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Can a shop rename MDR as a convenience fee?
The available sources do not establish a general exception allowing a merchant to collect an MDR-like amount merely by calling it a “convenience fee,” “service fee” or “platform fee.” They also do not resolve every arrangement in which a separately described service is sold under a separate agreement.
That leaves a practical boundary: a merchant should not present an ordinary prescribed UPI MDR surcharge as automatically lawful just because the label has changed. If a separately described amount appears, ask what service it covers, who imposes it and whether it is part of the payment acceptance charge or a distinct commercial service. Do not assume the label alone answers the legal question.
Who pays in each case?
Customer paying from a bank account
The customer should pay the displayed price, not an additional MDR line, when the payment is a prescribed bank-account UPI transaction. NPCI’s position is that both sides of this payment path are free.
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For the same path, the merchant should not be charged MDR under the stated no-charge rule. A bank or system provider is the type of actor addressed by section 10A’s prohibition on direct or indirect charges for prescribed modes.
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Customer paying from a PPI wallet
NPCI says the customer is not charged the PPI interchange. If an amount appears on the customer’s receipt, do not assume it is that interchange; request an itemized explanation and confirm the instrument used.
Merchant’s other business costs
A merchant may have costs for software, reconciliation, hardware, settlement or other services, but the sources cited here do not turn every such cost into an allowed UPI fee. The amount, contracting parties and service description must be examined separately.
Large businesses must provide UPI acceptance
The acceptance obligation is related to UPI but is not permission to charge UPI MDR. Section 269SU and Rule 119AA require a business to provide prescribed electronic payment facilities when its total sales, turnover or gross receipts exceeded ₹50 crore in the immediately preceding previous year.
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- RuPay-powered debit cards;
- UPI (BHIM-UPI); and
- UPI QR (BHIM-UPI QR Code).
The covered business must provide those facilities in addition to any other electronic payment facility it offers. The rule concerns acceptance availability. It does not say the business may add MDR to a customer’s UPI bill.
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Do not apply the UPI rule to card payments
Card payments have a separate regulatory treatment. The RBI direction cited for this topic concerns unbundling debit-card, credit-card and prepaid-card MDR. That subject should be checked under the current card rules and the merchant’s card-acquiring arrangement.
A QR code does not by itself identify the funding source. The same visual acceptance point can receive a bank-account UPI payment, a PPI-wallet payment or another instrument. Determine what actually funded the transaction before deciding which rule applies.
What to do if a merchant adds a UPI fee
- Keep the receipt and transaction record. Note the total, the extra line item, the date and the payment app or instrument.
- Ask which instrument was used. Request confirmation of whether the payment came from a bank account, a PPI wallet or a card.
- Ask who imposed the amount. The merchant, bank, system provider and a separate service provider may be different parties.
- Request an itemized explanation. Ask the merchant to distinguish MDR or interchange from any separately described service charge.
- Compare the facts with the applicable rule. For a prescribed bank-account UPI payment, refer to CBDT Circular No. 16/2020 and NPCI’s statement that bank-account UPI is free for customers and merchants.
- Handle a wallet transaction carefully. NPCI says customers are not charged the PPI interchange, so do not accept an assertion that the merchant-side interchange is automatically payable by you.
- Escalate with documents if needed. Give the payment provider or relevant institution the transaction ID, receipt and written explanation. The official material covered here does not provide one universal complaint route for every type of separately described merchant fee.
Worked examples
Example: ₹1,000 bank-account UPI purchase
A customer scans a merchant’s UPI QR and approves a ₹1,000 payment from a linked bank account. The merchant should receive the transaction under the bank-account UPI path, and the customer should not be asked to pay an additional MDR amount. A receipt showing ₹1,000 plus “UPI MDR” conflicts with the stated treatment of prescribed UPI.
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Example: wallet-funded UPI purchase
A customer selects a PPI wallet in an interoperable UPI flow. NPCI’s position is that interchange can apply to the merchant transaction, while the customer is not charged that interchange. The merchant’s settlement arrangement therefore should not be represented to the customer as ordinary bank-account UPI MDR.
Example: card entered at a QR-enabled checkout
If the customer ultimately funds the purchase with a card, the transaction belongs in the card-rule analysis. The no-MDR statement for prescribed bank-account UPI does not settle the card MDR question.
How widespread was free bank-account UPI?
NPCI reported in a 29 March 2023 release that more than 8 billion UPI transactions per month were being processed free for customers and merchants using bank accounts. The same release said bank-account-to-bank-account transactions represented more than 99.9% of UPI transactions at that time. These are 2023 figures, not a current transaction count.
The statistic helps explain why “UPI MDR” is often misunderstood: the overwhelming payment path described by NPCI was bank-account UPI, while the PPI interchange arrangement was a distinct category.
Quick Recap
Key distinctions to remember
- MDR is a merchant-side payment-acceptance charge, not a synonym for every UPI payment.
- Prescribed bank-account UPI and UPI QR payments are covered by the no-charge clarification from 1 January 2020.
- NPCI says bank-account UPI is free for customers and merchants.
- PPI-wallet merchant transactions have a separate interchange arrangement, and NPCI says the customer is not charged that interchange.
- The section 10A prohibition specifically addresses charges imposed by a bank or system provider for prescribed modes.
- Businesses above the ₹50 crore preceding-year threshold have an acceptance obligation under section 269SU and Rule 119AA; that is not permission to add UPI MDR.
- Card MDR must be analyzed under card-specific rules.
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