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UPI Salary Payments: Will MDR Apply? Experts Clarify New Rules
- •The Ministry of Finance clarified that UPI Person-to-Person (P2P) transactions remain free, while Merchant Discount Rate (MDR) applies to specified Person-to-Merchant (P2M) transactions above Rs 2,000.
- •Employers using UPI for salary payments need to understand if these are classified as P2P or P2M transactions to determine MDR applicability.
- •According to Mayank Parashar of Clasis Law, if an employer pays an individual employee directly via UPI and it's processed as a P2P transaction, MDR should not apply.
- •Employers are not required to switch to UPI for payroll; existing methods like NEFT, RTGS, and NACH remain valid.
- •A key question arises for households and small businesses paying domestic workers via UPI: whether these payments are P2P or P2M, as this distinction determines if MDR will be charged.
Key Questions Answered
Where a payment is made directly by an employer to an individual employee and processed as a P2P transaction, the revised MDR framework should not create an additional cost merely because it represents wages or salary. Employers are not required to migrate payroll systems to UPI and can continue using existing mechanisms like NEFT, RTGS, or NACH.
On September 15, 2026, the Ministry of Finance clarified that UPI will remain completely free for Person-to-Person (P2P) transactions, regardless of the amount transferred. MDR will instead apply only to specified Person-to-Merchant (P2M) transactions above Rs 2,000.
The Code on Wages, 2019 recognises electronic payment as a permissible mode, with Section 15 permitting wages to be paid by crediting an employee’s bank account or through electronic mode. The revised UPI MDR framework does not alter these permissible modes under the code, but adds a point for finance teams to consider.
