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For a normal bank-account-to-bank-account UPI payment, MDR is not charged to either the customer or the merchant. The Income Tax Department says charges including MDR do not apply to prescribed UPI modes from 1 January 2020, and NPCI states that bank-account UPI remains free for customers and merchants.
The answer changes when the payment uses a prepaid wallet (PPI) through interoperable UPI, or when the payment is actually made by card. Those are different payment paths with different fee arrangements. A merchant also cannot assume that renaming MDR as a convenience fee automatically makes a UPI surcharge lawful.
What MDR means in a UPI transaction
MDR stands for merchant discount rate. It is a payment-acceptance charge associated with a merchant receiving a digital payment. In a conventional card transaction, the merchant’s acquiring bank or payment provider may collect a percentage or fixed amount from the transaction value before settling the balance.
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MDR is therefore not the same thing as a surcharge that a shop adds to a customer’s bill. The word describes the payment-acceptance economics between financial institutions, networks, providers and merchants. Whether any charge exists depends on the payment instrument and the rules applying to that instrument.
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For prescribed UPI modes, the official rule is narrower and more specific: a bank or system provider must not impose a charge, directly or indirectly, on a person making or receiving the payment. The relevant statutory provision is Section 10A of the Payment and Settlement Systems Act, read with Section 269SU of the Income-tax Act and Rule 119AA.
Why ordinary bank-account UPI has no MDR
The Central Board of Direct Taxes (CBDT), in Circular No. 16/2020 dated 30 August 2020, clarified the effective date and scope of the no-charge rule. Its wording states: “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.”
The prescribed modes include UPI and UPI QR (BHIM-UPI and BHIM-UPI QR Code). NPCI separately says that bank-account-to-bank-account UPI transactions are free for both customers and merchants. Taken together, these statements mean that a regular UPI payment funded directly from a bank account should not produce an MDR line for the merchant or an MDR surcharge for the customer.
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UPI payment paths are not all the same
Before deciding whether a charge is permissible, identify what actually funded the payment. A QR code can be used with more than one instrument, and the visible “UPI” label does not by itself establish the underlying fee treatment.
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| Payment path | What the official material says | How to read a fee claim |
|---|---|---|
| Bank account to bank account through UPI | NPCI says the transaction remains free for customers and merchants. | This is the ordinary UPI answer: do not add MDR to the customer’s bill. |
| Payment through a prescribed UPI QR mode | UPI QR is a prescribed mode, and CBDT says no charge including MDR applies from 1 January 2020. | A merchant should not pass an MDR surcharge to the customer for this route. |
| Prepaid payment instrument (PPI) wallet used for a merchant UPI payment | NPCI says an interchange arrangement applies to PPI merchant transactions, while the customer is not charged that interchange. | Do not call this universal UPI MDR or assume the customer owes the merchant the interchange. |
| Debit, credit or prepaid card | RBI’s cited direction deals with unbundling card MDR by card type. | Apply card-specific rules; the UPI no-MDR treatment does not automatically cover cards. |
What happens when a PPI wallet is used
A PPI wallet is a prepaid payment instrument. When a customer uses such a wallet for a merchant payment through interoperable UPI, the transaction follows a different commercial path from a direct bank-account UPI transfer.
In a 29 March 2023 release, NPCI said interchange is applicable only to PPI merchant transactions and that there is no charge to the customer. The release also expressly preserved free bank-account-to-bank-account UPI. This is a merchant-side arrangement within the payment ecosystem; it is not permission to add a wallet “MDR” amount to the customer’s receipt.
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The cited official material does not establish a current interchange percentage, so a merchant or article should not quote a rate as though it applies to every wallet transaction. The exact provider agreement, payment route and settlement arrangement would determine how that interchange is handled between participating entities.
Can a shop charge extra for UPI?
For the prescribed UPI modes covered by the government clarification, MDR is not applicable from 1 January 2020. A shop should not add a line such as “UPI MDR,” “UPI charge” or “QR fee” to recover a bank-account UPI acceptance cost from the customer.
The official material does not establish a general exception allowing a merchant to rename MDR as a “convenience fee,” “platform fee” or “service charge” and collect it from a UPI customer. It also does not resolve every arrangement in which a business sells a separately described service under a separate contract and prices that service independently of payment acceptance. Those are fact-specific questions, not a blanket authorization to surcharge UPI payments.
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If a receipt shows an unexplained amount, ask what it represents, which payment instrument was used, and who imposed it. The label alone does not prove that the amount is lawful or that it is MDR.
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Bank-account UPI
Neither side should pay MDR for the prescribed bank-account UPI route described by CBDT and NPCI. The customer pays the displayed purchase price, and the merchant receives the UPI settlement without an MDR deduction under that rule.
PPI-wallet UPI
NPCI’s stated interchange applies to PPI merchant transactions, but the customer is not charged that interchange. Do not treat a merchant-side settlement arrangement as a customer liability.
Card payments
Card acceptance has its own MDR framework. The RBI direction cited for this topic concerns unbundling debit, credit and prepaid card MDR. A merchant may have card-related costs even though the same merchant cannot charge MDR for a prescribed bank-account UPI payment.
Separately described business fees
The reviewed official statements do not settle every fee that a business might characterize as a service supplied independently of payment acceptance. Request an itemized explanation rather than assuming either that every extra amount is prohibited MDR or that every new label is allowed.
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Which businesses must provide UPI acceptance?
The acceptance obligation is separate from the no-MDR rule. Under Section 269SU and Rule 119AA, a business whose total sales, turnover or gross receipts exceeded ₹50 crore in the immediately preceding previous year must provide prescribed electronic payment facilities.
The listed facilities are:
- RuPay-powered debit card acceptance;
- UPI (BHIM-UPI); and
- UPI QR (BHIM-UPI QR Code).
The business may offer other electronic modes as well. Meeting this acceptance requirement does not create permission to charge MDR on UPI. It answers whether the covered business must make the specified payment options available, not who may impose a transaction fee.
How to check a disputed UPI fee
Use the transaction details, not just the QR sticker or the wording on a receipt. The following sequence separates a genuine payment-path issue from an unexplained surcharge.
- Identify the instrument. Check whether the payment was funded from a bank account, a PPI wallet or a debit/credit/prepaid card.
- Record the amount and timing. Keep the receipt, the amount requested, the amount debited in the app and the settlement or confirmation screen.
- Ask who imposed the amount. Request the merchant’s itemized receipt and ask whether the line is claimed to be MDR, interchange, a tax, a product charge or a separate service fee.
- Compare the route with the rule. For bank-account UPI or a prescribed UPI QR payment, point to CBDT Circular No. 16/2020 and NPCI’s statement that bank-account UPI is free to customers and merchants.
- Handle wallet payments separately. If a PPI wallet was used, do not assume the customer owes the merchant an interchange amount; NPCI says the customer is not charged that interchange.
- Escalate with evidence. Keep the payment reference, receipt and the merchant’s explanation together when contacting the relevant bank, wallet provider or payment service. The official sources cited here do not provide one universal complaint process for every fee dispute.
Examples that show the difference
Example 1: Bank-account scan at a grocery store
A customer scans the store’s UPI QR code and approves payment from a bank account. The store cannot add “2% UPI MDR” to the bill under the prescribed-mode rule. The customer’s bank-account payment and the merchant’s UPI settlement are the relevant facts.
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Example 2: Wallet balance used through interoperable UPI
The customer selects a prepaid wallet as the funding source. NPCI’s PPI arrangement may involve merchant-side interchange, but the customer should not be presented with that interchange as a surcharge.
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Example 3: The QR opens a card payment
The customer completes the transaction with a card rather than a bank account. This is a card transaction for fee purposes. Card MDR rules and disclosures apply separately from the UPI bank-account rule.
Example 4: A receipt lists “service fee”
The receipt does not identify the fee as MDR, and the business says it is for a separately supplied service. The available official material does not decide that fact pattern automatically. Ask for the service description, terms and itemization instead of treating the label as conclusive.
What the 2023 NPCI figures do—and do not—show
NPCI reported in its 29 March 2023 release that more than 8 billion UPI transactions per month were being processed free for customers and merchants using bank accounts. It also said bank-account-to-bank-account transactions represented more than 99.9% of UPI transactions at that time.
Those are 2023 figures, not a current transaction forecast. They illustrate how dominant the bank-account route was in the cited period, while the separate PPI interchange arrangement explains why “UPI” should not be treated as a single identical payment path in every case.
Bottom line for customers and merchants
If the money moves directly from a bank account through a prescribed UPI or UPI QR mode, MDR should not be charged to the customer or merchant under the cited rule. A PPI-wallet UPI payment has a distinct merchant-side interchange arrangement, but NPCI says the customer is not charged. Card payments must be analyzed under card rules. When a receipt contains an unfamiliar fee, verify the instrument and demand an itemized explanation rather than accepting “UPI MDR” as a sufficient answer.
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