Starting October 15, 2026, UPI merchant transactions over ₹2,000 will attract a 0.4% Merchant Discount Rate (MDR) capped at ₹300. While this adds a cost, tax experts clarify that MDR qualifies as a deductible business expense, and GST-registered merchants can claim Input Tax Credit (ITC) to lower the total financial burden.
From October 15, 2026, businesses accepting Unified Payments Interface (UPI) payments will move to a new cost structure. The National Payments Corporation of India (NPCI) has introduced a Merchant Discount Rate (MDR) of 0.4% on Person-to-Merchant (P2M) transactions that exceed ₹2,000. This charge is capped at a maximum of ₹300 per transaction for payments of ₹75,000 and above. Transactions up to ₹2,000 will continue to remain free for both consumers and merchants.
As businesses prepare for this change, there is clarity regarding how to account for these fees. Tax experts and advisors have confirmed that the MDR paid to banks and payment service providers is treated as a service fee rather than a government tax. This classification allows businesses to claim the MDR as a legitimate business expenditure.
By treating the MDR as a business expense, companies can deduct this amount from their total revenue when calculating taxable profits. While this does not mean the expense disappears, it does lower the amount of profit subject to income tax, effectively sharing the cost burden with the tax authorities. The exact benefit will depend on the business's applicable tax slab and overall profitability.
Beyond income tax deductions, the role of Goods and Services Tax (GST) is a significant factor for merchants. The 0.4% MDR charge will attract an additional 18% GST. For merchants who are registered under the GST framework, this is a manageable cost. These businesses can claim Input Tax Credit (ITC) on the GST paid, which effectively allows them to recover a portion of the tax paid on the transaction fees, further reducing the net cost of accepting digital payments.
However, the financial impact will not be the same for all merchants. Smaller businesses operating under the composition scheme, or those dealing in GST-exempt goods, are not eligible to claim Input Tax Credit. For these entities, the 0.4% MDR plus the 18% GST represents a direct, non-recoverable increase in their cost of doing business. This segment of the market may face a higher effective cost burden compared to larger, tax-registered corporations.
For investors and business owners, the key monitorable is how companies manage these added transaction costs. While the tax deductibility and ITC provide a cushion, high-volume merchants with thin profit margins may feel the pressure. It will be important to track whether businesses choose to absorb these costs to maintain customer volume or adjust their pricing to offset the new payment processing fees.