UPI Zero-MDR Regime in India: Section 269SU, PSS Act §10A, and What It Means for Merchant Fee Reconciliation

A D2C apparel founder pulls up the Razorpay settlement file and sees the headline number she expected — fees around 2% of GMV. She also knows, vaguely, that UPI is supposed to be zero-MDR. The two statements feel contradictory, and they are not. The reconciliation question for any controller who lives in this gap is not “is UPI free?” — it is “which component of this 2% is regulated to zero, which is contracted with the gateway, which is interchange on a non-bank-account UPI flow, and which is GST?” Get that decomposition right and a meaningful share of merchant fee leakage becomes recoverable.

Quick reference

Zero-MDR on UPI P2M is current law as of June 2026 but under active review — the Parliamentary Standing Committee on Finance (report tabled 12 March 2026) and the Payments Council of India have proposed tiered/30 bps MDR for large merchants; no binding RBI/CBDT notification yet.

What is the legal basis of UPI zero-MDR India?

UPI zero-MDR India is not a single RBI circular. It is a three-piece statutory arrangement that came together in late 2019 and went live on 1 January 2020.

The first piece is Section 269SU of the Income-tax Act 1961, inserted by the Finance (No. 2) Act 2019. It directs every business with annual turnover above ₹50 crore to “provide facility for accepting payment through prescribed electronic modes” in addition to whatever other modes the business already accepts. The second piece is Rule 119AA of the Income-tax Rules, which prescribes those electronic modes — currently UPI, BHIM-UPI QR and RuPay debit. The third piece is Section 10A of the Payment and Settlement Systems Act 2007, also inserted by the Finance (No. 2) Act 2019, which prohibits the bank or the system provider from levying any charge “upon a payer making payment, or upon a beneficiary receiving payment, through electronic modes prescribed under section 269SU.” See the Income Tax Department’s official statute repository for the consolidated text of §269SU and Rule 119AA.

Section 271DB of the Income-tax Act then provides the enforcement teeth — a penalty of ₹5,000 per day for businesses that fall within §269SU but fail to offer the prescribed modes. CBDT operationalised this through Circular 32 of 2019, with the penalty effective from 1 February 2020. NPCI and acquiring banks aligned interchange and switching arrangements to zero from 1 January 2020.

The practical effect is that on bank-account UPI P2M and RuPay debit P2M, the network MDR is regulated to zero — and on any non-zero network MDR appearing in a settlement file against these instruments, the merchant has a statutory basis to push back.

What does the UPI zero-MDR regime actually cover?

Two instruments, narrowly defined.

Bank-account UPI P2M. A consumer pays a merchant from a UPI handle linked to a bank savings or current account. The funds move bank-to-bank over the UPI rail. The merchant receives the principal value; the network MDR is zero; the issuer bank, NPCI and acquiring bank earn nothing on the rail itself. Government incentive payouts (the BHIM-UPI subsidy scheme) compensate the ecosystem for the foregone MDR — the FY27 Union Budget allocates ₹2,000 crore to this scheme, with the actual FY26 outlay reported by Business Standard at ₹2,196 crore.

RuPay debit card P2M. Card-present and card-not-present transactions on a RuPay debit card moved to zero MDR from 1 January 2020, in line with the §269SU and PSS Act §10A architecture. NPCI made this network-level. The non-RuPay debit cards (Visa and Mastercard) continue to be governed by the RBI MDR-rationalisation circular of December 2017 — 0.40% MDR (capped at ₹200 per transaction) for merchants with turnover up to ₹20 lakh, and 0.90% (capped at ₹1,000 per transaction) for larger merchants. The ₹50 crore §269SU threshold sits well above either of those slabs, so for any large merchant, the practical contrast is between zero on UPI bank-account / RuPay-debit and a capped percentage on Visa/Mastercard debit.

That is the full perimeter. Everything else — credit cards on any network, wallets, prepaid instruments, RuPay credit on UPI, PPI on UPI, credit-line on UPI, EMI, BNPL, net banking, international cards — sits outside the zero-MDR regime and continues to carry network MDR plus gateway platform fee plus GST.

What does the UPI zero-MDR regime NOT cover?

This is where most reconciliation leakage hides. The settlement file presents a clean “UPI” column, but the column contains three economically distinct rails.

RuPay credit-on-UPI — a RuPay credit card linked to a UPI handle. NPCI’s interchange schedule is zero up to ₹2,000 per transaction and approximately 2% above that, split as roughly 1.5% to the issuer and 0.5% to the network and acquirer. The customer pays nothing extra; the merchant bears the cost. A D2C brand with an average ticket of ₹2,400 will see most of these in the chargeable band. The cell looks like UPI on the settlement line but priced like a credit card.

PPI / wallet on UPI — interoperable wallets riding the UPI rail. Per NPCI’s 24 March 2023 circular, effective 1 April 2023, transactions up to ₹2,000 attract nil interchange, and transactions above ₹2,000 attract 0.5% to 1.1% interchange paid by the merchant. A separate 15 basis-point wallet-loading fee on transactions above ₹2,000 is borne by the PPI issuer, not the merchant, but the 0.5%–1.1% interchange is on the merchant.

Credit-line on UPI — pre-sanctioned credit lines from banks deployed onto the UPI handle. Pricing is set by the issuing bank and behaves like a credit product, not a debit instrument.

These three are NPCI-mandated cost components, separate from the gateway platform fee. The reconciliation has to keep them apart. A merchant who treats “UPI” as a single zero-cost bucket on the settlement file is silently absorbing 1% to 2% on the credit-on-UPI and PPI-on-UPI volume.

How is network MDR different from gateway platform fee?

This distinction is the single most frequent source of confusion between founders, controllers and CFOs in this category — and it is the distinction that determines whether the headline “UPI is free” framing or the headline “UPI cost me ₹6 lakh last month” framing is correct. Both can be true in the same settlement file.

Network MDR is the instrument-level cost — what the merchant pays to the issuer bank, the network (UPI, Visa, Mastercard, RuPay, Amex, Diners) and the acquirer for the right to use the rail. This is the component governed by the §269SU + PSS Act §10A regime for prescribed e-modes. On UPI bank-account and RuPay debit P2M, it is zero by law. On Visa/Mastercard debit, it is capped by the 2017 RBI circular. On credit cards and Amex/Diners, it is uncapped and negotiated.

Gateway platform fee is the technology-layer cost — what the merchant pays the payment aggregator (Razorpay, PayU, Cashfree, PhonePe PG, Paytm, BillDesk, Pine Labs, Mobikwik) for the checkout, fraud screening, smart routing, settlement automation, refund handling, dashboard, reporting and API infrastructure. This is a commercial fee. It is not regulated. It applies on every instrument including bank-account UPI. Published rate cards typically show 1.95% to 2%; enterprise-contracted rates at ₹1 crore plus monthly GMV typically run 1.4% to 1.6%; promotional rates appear and disappear (Cashfree’s 10-year anniversary 1.6% locked-12-month offer, PhonePe’s “Free” launch promo).

GST at 18% sits on top of the platform fee — never on the transaction value. A 2% platform fee becomes 2.36% effective once GST is added, and the 0.36% is recoverable as Input Tax Credit against GSTR-2B if the gateway issues a valid GST invoice.

The two cost layers are accounting siblings on every settlement line. Zero network MDR does not imply zero platform fee. A positive platform fee does not imply that anyone is breaking zero-MDR law. Treating them as the same number is the underlying mistake the “UPI is free” instinct keeps making.

Worked example — a D2C apparel brand at ₹3 crore monthly UPI GMV

Take a D2C apparel brand processing ₹3 crore of monthly UPI bank-account P2M through Razorpay on the published 2% platform fee.

• Network MDR on UPI bank-account P2M = 0%, by statute. The settlement file shows ₹0 on this line.
• Gateway platform fee = 2% × ₹3,00,00,000 = ₹6,00,000 per month.
• GST at 18% on the platform fee = 18% × ₹6,00,000 = ₹1,08,000 per month.
• Total monthly deduction = ₹7,08,000, of which ₹1,08,000 is recoverable as ITC if the gateway tax invoice cleanly reconciles to GSTR-2B.
• The “network MDR” line on the settlement file is zero, in compliance with §269SU and PSS Act §10A. The fee deducted is entirely platform fee plus GST.

Now suppose the controller negotiates an enterprise rate of 1.5% (well within published enterprise bands at this scale).

• Platform fee = 1.5% × ₹3,00,00,000 = ₹4,50,000 per month.
• GST at 18% = 18% × ₹4,50,000 = ₹81,000 per month.
• Total monthly deduction = ₹5,31,000.
• Monthly saving from negotiation = ₹7,08,000 − ₹5,31,000 = ₹1,77,000.
• Annual saving = ₹1,77,000 × 12 = ₹21,24,000 (₹21.24 lakh).

Two observations follow.

First, the saving is real even though the regulated MDR is zero on both sides of the comparison. Zero-MDR did not eliminate cost; it shifted the entire merchant cost into the platform fee, which is contractual rather than regulatory. The negotiation lever is the only lever.

Second, if any portion of that ₹3 crore is actually RuPay-credit-on-UPI above ₹2,000 (around 2% interchange) or PPI-on-UPI above ₹2,000 (0.5%–1.1% interchange), the gateway’s settlement file ought to show that interchange as a separate line. If it does not — if RuPay-credit-on-UPI volume is being silently rolled into the bank-account-UPI bucket and charged only the bank-account UPI platform fee — the gateway is absorbing the interchange, which is rare. The far more common case is that the merchant is paying the interchange but does not see it broken out, and so cannot tell what share of the 2% platform fee they negotiate against actually applies.

Reconciliation discipline — the five checks that matter

Strip the cluster down to five auditable checks that any controller can run against a settlement file plus a contracted rate card.

Check one — zero-MDR verification on prescribed e-modes. Filter the settlement file to UPI bank-account P2M and RuPay debit P2M transactions. Sum the “network MDR” or “interchange” column. The expected total is zero. Any non-zero value is an exception that the gateway must explain — either a mis-categorisation (a RuPay-credit-on-UPI transaction rolled into the bank-account bucket and now being shown with its 2% interchange against the wrong instrument label), a system error, or a posture the merchant has a statutory basis to challenge under §10A of the PSS Act.

Check two — UPI bucket decomposition. Split the “UPI” aggregate into bank-account UPI, RuPay-credit-on-UPI, PPI-on-UPI and credit-line-on-UPI sub-buckets, using rail-type flags or BIN tables where the file does not natively expose them. Compute the effective network rate per sub-bucket. Expected: 0% on bank-account UPI; 0 below ₹2,000 and around 2% above on RuPay-credit-on-UPI; 0 below ₹2,000 and 0.5%–1.1% above on PPI-on-UPI. Any sub-bucket sitting at the wrong rate, or any “UPI” line that resists decomposition, is the leakage signal.

Check three — platform-fee variance against contracted rate. Compute the platform fee actually billed (excluding any non-zero network MDR component identified above) divided by GMV for each rail sub-bucket. Compare to the contracted rate for that rail sub-bucket. Tolerance should be tight — single-digit basis points. A 15 basis-point sustained gap at ₹3 crore monthly volume is ₹4,500 per month, or roughly ₹54,000 a year before GST, recoverable through a fee adjustment ticket.

Check four — GST cross-check. Confirm that GST appears as a separate 18% line on the platform fee only, not on transaction value, not on the network MDR. Tie the monthly GST charged to the gateway’s tax invoice and to GSTR-2B for ITC claim. Where the gateway combines the fee plus GST into a single deduction line, request the tax invoice to break it out — the ITC is only claimable against a valid tax invoice.

Check five — refund treatment on the platform fee. For every refunded transaction, check whether the platform fee from the original transaction is reversed in the settlement. Industry practice on network MDR (where positive) is that it is non-refundable; on platform fee, treatment varies by contract. Where the contract says the platform fee is reversed on refund and the settlement does not reverse it, that is a recoverable variance. Where the contract is silent or says the platform fee is retained, that retention is a real cost that should sit in the gateway-cost line of the P&L and be modelled in the refund-rate sensitivity.

Where does this leave a CFO planning for FY27?

Three calibration notes.

One — the regime is current law but under live review. The Parliamentary Standing Committee on Finance report tabled 12 March 2026 recommended a tiered MDR for large merchants. The Department of Financial Services has flagged that the BHIM-UPI incentive scheme covers only a fraction of industry-borne costs. The Payments Council of India proposed a regulated 30 basis-point MDR on UPI P2M for merchants with annual turnover above ₹20 lakh. The Union Finance Ministry publicly denied on 11 June 2025 that a UPI MDR was being introduced, and the FY27 Budget continues to fund the zero-MDR subsidy at ₹2,000 crore. The most likely near-term scenario is no change in FY27; the second most likely is a tiered MDR for merchants above some turnover threshold from FY28 or FY29. Plan against both.

Two — separate the published rate from the contracted rate as the reconciliation baseline. Published rates on Razorpay, PayU and Cashfree cluster at 1.95% to 2% for blended domestic, with 3% on premium / Amex / Diners / international / EMI. These are the right baseline for a sub-₹5 lakh-monthly merchant. For a brand processing ₹1 crore plus per month, the contracted rate — commonly 1.4% to 1.6% on cards, often lower on UPI-heavy mixes — is the reconciliation truth, and the gap between the published and contracted rate is not “the gateway being generous”; it is what the merchant negotiated and what every settlement should be priced against.

Three — GST law is unchanged, and the 18% on fee remains a separate recoverable line. Across every gateway, every rail and every promotional scheme, GST is 18% of the platform fee, never of the transaction value. The ITC against GSTR-2B is real money. A ₹6 lakh monthly platform fee produces ₹1.08 lakh of ITC; an enterprise-negotiated ₹4.5 lakh fee produces ₹81,000. Twelve months of ITC on the difference is around ₹3.24 lakh — money that flows back through GSTR-3B if and only if the gateway tax invoice is in place and tied to the settlement file in reconciliation.

The reconciliation question, then, is not whether UPI is “free.” It is whether the merchant is correctly billed for the components that are not free, and correctly billed at zero for the components that are.

Continue reading in this cluster

• MDR fee reconciliation — verifying gateway charges against contracted rates — the operational playbook for matching every settlement line to the contracted rate card.
• Platform fee leakage on Razorpay and PayU — where the gap between published rates, contracted rates and actual billed rates accumulates into recoverable cost.
• Razorpay settlement reconciliation — gateway-specific reconciliation walkthrough.
• Cluster hub: Merchant fees insights · Money page: Payment gateway reconciliation