UPI MDR means the merchant discount rate associated with accepting a payment. In the conventional model, the acquiring bank charges this acceptance fee to the merchant. But for the prescribed BHIM-UPI and UPI QR modes in India, the government says charges—including MDR—are not applicable from 1 January 2020. The ₹2,000 figure sometimes mentioned alongside UPI applies to a past government incentive scheme, not to a cutoff above which merchants can charge MDR.
What MDR means
MDR, or merchant discount rate, is an acceptance fee associated with a merchant taking electronic payments. In the conventional model, the acquiring bank charges the fee to the merchant. The fee is not automatically an amount that should be added to a customer’s bill merely because it is called a merchant discount rate.
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MDR may be distributed across several participants in a payment transaction. The Reserve Bank of India describes the distribution as including the issuer, payment network, acquirer and other entities in the payment chain, such as payment aggregators. In its description, the issuer’s share is called issuer interchange and the network’s share is called a network fee. RBI’s description of MDR explains this conventional payment-chain model.
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This is useful context for understanding why an acceptance fee may be discussed as a payment-system cost, but it does not determine whether a particular mode can legally carry a charge. The ordinary commercial model and the specific rule for prescribed UPI modes are separate points. A merchant may ordinarily be the party that bears MDR in a conventional arrangement; that does not mean a bank or system provider may charge MDR for a mode covered by the UPI no-charge rule.
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Does MDR apply to UPI?
For the modes prescribed under section 269SU of India’s Income-tax Act—including BHIM-UPI and UPI QR—the government position is that no charge, including MDR, applies from 1 January 2020. Section 10A of the Payment and Settlement Systems Act bars banks and system providers from imposing a charge on either the payer or beneficiary for those prescribed modes.
The Central Board of Direct Taxes (CBDT) clarified in Circular No. 16/2020 that charges collected on the covered modes from 1 January 2020 should be refunded and that future charges should not be imposed. It stated: “Such practice on part of banks is a breach of section 10A of the PSS Act as well as section 269SU of the IT Act.” Read the CBDT Circular No. 16/2020 for the formal clarification.
Keep two points distinct: merchants ordinarily bear MDR under the conventional acceptance-fee model, but the prescribed UPI modes have a specific no-charge rule. That rule concerns charges imposed by banks or system providers on the payer or beneficiary for those modes. It does not establish that every service marketed in connection with UPI, including a separate value-added service, must be free; check the service and its terms rather than treating it as MDR.
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Who pays, receives or is protected from a UPI charge?
| Concept | Who pays or is protected? | What happens to the money? |
|---|---|---|
| Conventional MDR | The merchant ordinarily bears the acquiring-side acceptance fee. | The acquirer may distribute it among payment-chain participants, including the issuer, network and other entities. RBI |
| Charge on prescribed BHIM-UPI or UPI QR | Neither payer nor beneficiary may be charged by a bank or system provider for the prescribed mode under section 10A. | MDR is not applicable to these modes from 1 January 2020, as clarified by CBDT Circular No. 16/2020. |
| FY 2024-25 government incentive | It was support for eligible low-value BHIM-UPI person-to-merchant transactions at small merchants, not a merchant charge. | The government paid acquiring banks, with the incentive shared among ecosystem participants. The Cabinet announcement describes the scheme. |
The second row is the practical answer to “Who pays MDR on UPI transactions?” For the prescribed BHIM-UPI and UPI QR modes, the rule is not that the payer pays while the merchant does not, or vice versa: banks and system providers may not impose a charge on either the payer or beneficiary for those modes. The first row describes the conventional MDR arrangement, not an exception to the UPI rule.
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Does the ₹2,000 threshold change UPI MDR?
No. The ₹2,000-per-transaction figure belonged to a time-limited government incentive scheme for eligible small-merchant BHIM-UPI person-to-merchant transactions during FY 2024-25. The scheme ended on 31 March 2025. The Prime Minister’s Office announcement described a 0.15% incentive rate for eligible transactions up to ₹2,000; that was not MDR charged to merchants and does not create an MDR-free limit below ₹2,000.
The Cabinet announcement described zero MDR for both small and large merchants. The incentive was a separate government payment to acquiring banks, with sharing across payment-ecosystem participants. It should not be treated as an ongoing benefit in FY 2026-27 without a current official notification. See the 2025 Cabinet announcement on the FY 2024-25 incentive scheme.
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1Repair Windows errors before they cause bigger problems2Fix the driver behind crashes, sound loss and screen glitches3Clear out junk files and repair common Windows errorsIn other words, ₹2,000 was relevant to whether a particular small-merchant transaction could qualify for incentive treatment under that scheme. It was not a price band in which UPI was free below the threshold but subject to MDR above it. The scheme’s 0.15% figure also describes the incentive, not a percentage deducted from the merchant’s payment or added to the customer’s bill. The no-charge position for prescribed modes and the temporary incentive are two different policy matters.
Which businesses must provide UPI acceptance facilities?
The CBDT circular says a business whose total sales, turnover or gross receipts exceeded ₹50 crore in the immediately preceding year must provide facilities for prescribed electronic modes, including BHIM-UPI and UPI QR. This is a requirement for businesses above that stated threshold, not a general mandate that every business must accept UPI.
The ₹50 crore figure concerns the acceptance-facility obligation; it is not an MDR threshold. The circular also says that businesses within the requirement should not impose a charge for use of the prescribed modes. Consult CBDT Circular No. 16/2020 for the legal wording and scope.
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This facility requirement should not be confused with the separate rule about charges. One tells specified businesses—those above the turnover threshold in the immediately preceding year—to provide facilities for the prescribed modes. The other addresses charges on use of those modes. Neither figure means that a smaller business is required to accept UPI, nor does the ₹50 crore threshold create permission to charge MDR below or above a particular transaction value.
How a merchant sets up UPI acceptance
A merchant seeking to accept UPI ordinarily partners with an acquiring bank, which provides the UPI infrastructure and handles onboarding details such as the merchant’s identity and business category. NPCI lists several ways to integrate acceptance; choosing one does not alter the prescribed-mode no-charge rule.
The integration choice is about how a customer initiates or completes a payment, not about setting a different MDR cutoff. NPCI lists QR, intent, application-based and collect modes. The merchant should discuss onboarding and the appropriate integration with an acquiring bank, while keeping any separately offered service distinct from the prescribed payment mode itself.
- Contact an acquiring bank. Ask about its merchant onboarding process and provide the business details it requires. NPCI describes the acquiring-bank relationship as part of merchant acceptance; the bank handles onboarding information including merchant identity and business category.
- Choose an integration mode. NPCI lists QR, intent, application-based and collect modes. The appropriate option depends on how the business takes payments; the available public information does not establish that one option carries a particular price or is required for every merchant.
- Confirm what is being offered. Distinguish the covered UPI acceptance mode from any separate service or value-added product, and review the terms for that separate service. Do not assume a product-specific fee is MDR, or that the no-charge rule makes every separate service free.
NPCI’s UPI product overview describes merchant integration options, and its merchant information covers the acquiring-bank relationship.
What to do if a UPI MDR charge appears
- Identify the charge and mode. Check whether it is described as MDR or as a separate service fee, and whether the payment was made through BHIM-UPI or UPI QR as prescribed under section 269SU.
- Ask the bank or provider for an explanation. Request the basis for the charge and whether it is imposed on the payer or beneficiary for the prescribed mode.
- Keep the transaction evidence. Save the receipt, statement entry and any explanation provided. If the charge was collected by a bank or system provider on a covered mode, refer to the CBDT clarification that such charges collected from 1 January 2020 should be refunded and should not be imposed in future.
The legal no-charge rule should not be stretched to unrelated services or to every product described as UPI without checking the mode and the parties involved. For the covered modes, however, a bank or system provider cannot impose a charge on the payer or beneficiary under section 10A. If the charge is for something separate, establish what the service is and what its terms say before treating it as a violation of the MDR rule.
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Frequently asked questions
What is UPI MDR?
MDR is the merchant discount rate: an acceptance fee associated with a merchant accepting a payment. In the conventional model, it is ordinarily charged by the acquiring bank and borne by the merchant. For prescribed BHIM-UPI and UPI QR modes, however, the government says no charge, including MDR, applies from 1 January 2020.
Is UPI free for merchants?
For the prescribed BHIM-UPI and UPI QR modes, MDR is not applicable under the government clarification. That does not by itself show that every separate product or value-added service connected with payment acceptance is free. Check whether a quoted amount is for the prescribed mode or for a separate service and review that service’s terms.
Can a merchant charge extra for UPI?
The cited rule bars banks and system providers from imposing a charge on the payer or beneficiary for the prescribed modes. CBDT also says covered charges collected from 1 January 2020 should be refunded and not imposed in future. The precise answer depends on whether the payment used a mode covered by the rule and whether the amount is a charge for that mode or a distinct service fee.
Does UPI MDR apply above ₹2,000?
No. The ₹2,000 amount was the transaction limit for incentive treatment for eligible small-merchant BHIM-UPI person-to-merchant transactions under the FY 2024-25 scheme. It was not an MDR cutoff. That scheme ended on 31 March 2025, and its 0.15% rate was an incentive, not a merchant fee.
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Does every business have to accept UPI?
No general obligation for every business is established by the cited circular. CBDT says businesses whose total sales, turnover or gross receipts exceeded ₹50 crore in the immediately preceding year must provide facilities for prescribed modes, including BHIM-UPI and UPI QR. That threshold relates to specified acceptance facilities, not MDR.
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Frequently Asked Questions
Who pays MDR on UPI transactions?
In the conventional MDR model, the merchant ordinarily bears the acquiring-side acceptance fee. For prescribed BHIM-UPI and UPI QR modes, however, banks and system providers may not impose charges on the payer or beneficiary under section 10A.
Does UPI MDR apply above ₹2,000?
No. ₹2,000 was the per-transaction limit for eligible small-merchant transactions under a time-limited FY 2024-25 incentive scheme, not an MDR threshold. The scheme ended on 31 March 2025.
Can a merchant charge extra for UPI?
For prescribed BHIM-UPI and UPI QR modes, CBDT says charges collected from 1 January 2020 should be refunded and future charges should not be imposed. Check whether a fee is for a covered mode or a distinct value-added service.
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Does every business have to accept UPI?
No. CBDT identifies businesses whose sales, turnover or gross receipts exceeded ₹50 crore in the immediately preceding year as required to provide facilities for prescribed modes, including BHIM-UPI and UPI QR.
The Bottom Line
Bottom line: MDR is ordinarily a merchant-borne acceptance fee, but prescribed BHIM-UPI and UPI QR modes have had no applicable MDR from 1 January 2020. Neither the ₹2,000 incentive threshold nor the ₹50 crore acceptance-facility threshold changes that rule: the first concerned a past incentive scheme, and the second identifies specified businesses that must provide acceptance facilities.
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