UPI: For a ₹2,000 payment, you will pay ₹9.44 instead of ₹8 at a 0.4% MDR rate—understand the new math

There is a lot of discussion surrounding UPI payment charges. Now, 18% GST will also be levied on the merchant regarding the UPI MDR (Merchant Discount Rate), leading to a higher deduction on payments exceeding ₹2,000.

It is well known that merchants are charged an MDR on UPI payments exceeding ₹2,000. However, the calculation for this charge has changed. According to NPCI rules, a charge of 0.4% applies to payments above ₹2,000. While a merchant might have expected to pay ₹8 on a ₹2,000 transaction, they will now have to pay approximately ₹9.44 instead. Let’s understand this new calculation.

The government has clarified that 18% GST will also apply to the MDR—the fee the bank collects from the shopkeeper. However, this does not affect the customer directly. The government states that GST-registered shopkeepers can claim this 18% tax as input tax credit; in other words, merchants can adjust this amount when depositing their own taxes with the government, so most registered traders will not face an additional financial burden.

Now, let’s understand the actual math in simple terms.

Suppose a customer purchases goods worth ₹2,001 from a shop. They will make a UPI payment of exactly ₹2,001. While the customer pays ₹2,001, the shopkeeper (merchant) will not receive the full ₹2,001; instead, after a deduction of approximately ₹9.44, they will receive around ₹1,901.56.

Why was this ₹9.44 deducted?

 An MDR charge of ₹8 is levied on a transaction of ₹2,001 at a rate of 0.4%.
GST at a rate of 18% will also be deducted on this ₹8, amounting to ₹1.44.
This means the total charge deducted will be ₹9.44.

Will customers have to bear this charge?

The government has clarified that no merchant can pass the burden of this charge on to customers. The government is also preparing measures to block the QR code of any shopkeeper found collecting this charge after the rules come into effect; a grievance redressal system will also be implemented for this purpose.

However, contrary to the government's stance, shopkeepers have clearly stated that the cost will ultimately fall on the customers, as they cannot afford to pay this charge out of their own pockets. They say they will either have to revert to cash transactions or stop accepting digital payments exceeding ₹2,000.