Passing UPI MDR to customers is a criminal offence: Here's what the law says — experts weigh in

With UPI Merchant Discount Rate (MDR) set to apply from 15 October on eligible person-to-merchant (P2M) transactions above ₹ 2,000 at 0.4%, a key question for consumers is whether merchants can recover this cost from them.

MDR is a charge paid by the merchant to the bank or payment service provider for accepting digital payments.

Union Minister for Communications Jyotiraditya M Scindia on Wednesday made it clear that any attempt by merchants to pass the cost of MDR on UPI transactions to customers would violate the law and constitute a criminal offence, according to an ANI report.

Amitraj Kaushal, Advocate at the Supreme Court of India, said the prohibition comes from Section 10A of the Payment and Settlement Systems (PSS) Act, 2007.

“The provision bars banks and payment system providers from imposing any charge on a person making or receiving a payment through notified electronic modes, and UPI transactions have been brought within this by notification,” he said.

This means MDR cost cannot legally be passed on to the customer, Kaushal added.

However, Eishan Agnihotri, Associate Partner at Pioneer Legal, highlighted an important distinction.

“For transactions below ₹ 2,000, there is a statutory bar on any additional charge being imposed under the Payment and Settlement Systems Act. Above ₹ 2,000, there is no statutory bar that is operative,” he said.

According to Agnihotri, the restriction on passing MDR to customers for transactions above ₹ 2,000 currently comes from NPCI’s merchant onboarding conditions, which state that MDR cannot be passed on to customers.

“A violation here will only be a contractual breach. It does not have the force of a statute or law as the PSS does,” he added.

Kaushal said regulators would typically examine whether the final amount charged to the customer exceeds the actual price of the goods or services, with a separate line item such as “ digital payment charge” or “UPI surcharge” being a clear red flag.

However, Agnihotri said proving that the MDR cost was actually passed on to the customer could be more difficult when there is no separate charge.

“There are as of now no objective mechanisms prescribed that if any costs are being passed on to customers, they are to be mandatorily disclosed on the invoice or bill for MDR,” Agnihotri said.

A merchant could simply increase the price of a product or service to absorb the additional cost. In such cases, it would be difficult to establish that the price increase was specifically due to MDR, especially if the same price applies to all customers regardless of their payment method, he added.