Can Merchants Pass UPI MDR Surcharge to Customers? Official NPCI Circular Breakdown

As digital payment volumes dominate Indian retail and e-commerce, some merchants attempt to recover payment processing fees by adding a “2% UPI fee” or a “₹10 convenience charge” at checkout.

However, regulatory bodies have taken an unequivocal stance against this practice. Here is the legal, regulatory, and technical breakdown of the “No-Surcharge Rule” mandated by the Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI).

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Is It Legal to Charge Extra for UPI? The Official Stance

Direct Answer: No, it is strictly illegal in India for a merchant to charge an extra fee, markup, or surcharge on customers who choose to pay via UPI. Under RBI master directions and NPCI merchant operating guidelines, merchants must sell goods and services at the uniform posted price regardless of the payment method chosen by the buyer.

If an item is priced at ₹1,000 on your website or retail counter, the customer cannot be charged ₹1,020 simply because they chose Google Pay or PhonePe.

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NPCI and RBI Circular Breakdown

The regulatory ban on payment surcharging is anchored across multiple statutory instruments:

1. Payment and Settlement Systems Act, 2007 (PSS Act):
   • Mandates that authorized payment networks enforce fair merchant standards.
2. RBI Circular on Merchant Surcharges (RBI/2013-14/255):
   • Explicitly instructs all acquiring banks that merchant agreements must contain a mandatory clause barring merchants from levying any fee on debit cards and electronic fund transfers.
3. NPCI Operating Guidelines for UPI Merchants:
   • Section on Merchant Obligations prohibits any differential pricing that penalizes customers for selecting UPI over cash or card instruments.

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Surcharges vs Convenience Fees: Legal Distinctions

Many online businesses ask whether rebranding a surcharge as a “convenience fee” bypasses the ban. Here is how regulators interpret the distinction:

Practice	Mechanism	Legal Status	Regulatory Consequence
Direct UPI Surcharge	Adding 1% to 2% extra only when the customer selects UPI	STRICTLY ILLEGAL	Immediate acquiring terminal deactivation
Payment Method Surcharge	Charging ₹10 extra for UPI while cash is free	STRICTLY ILLEGAL	Consumer court penalty under unfair trade practices
Universal Platform Convenience Fee	Flat ticketing/booking fee applied to all checkout methods	Conditionally Permitted	Allowed only for specialized ticketing (IRCTC, cinema, events)
Cash Discount / UPI Incentive	Selling at ₹1,000 but offering ₹50 off for UPI	100% LEGAL	Encouraged to boost digital payment adoption

Offering a discount for UPI payments is completely legal and widely utilized by D2C brands to steer buyers away from cash-on-delivery (COD), which carries return-to-origin (RTO) risks.

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Penalties for Violating the No-Surcharge Rule

Merchants who disregard the no-surcharge directive face severe business disruptions:

• Merchant Terminal Disconnection: Acquirers (HDFC, ICICI, Paytm, BharatPe) are obligated under banking audits to immediately terminate merchant IDs (MIDs) of surcharging merchants.
• Blacklisting on the Central Fraud Registry: Repeat offenders risk being placed on acquirer negative lists, preventing them from opening new merchant accounts in India.
• Consumer Forum Action: Section 2(47) of the Consumer Protection Act, 2019 treats differential checkout pricing as an unfair trade practice, exposing businesses to financial restitution orders.

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How Merchants Can Protect Margins Legally

If surcharging customers is illegal, how can a business stop bleeding margins to payment processors?

Instead of attempting illegal checkout markups, eliminate the root cause: the 2% aggregator tax.

Traditional payment gateways deduct 2% on every single order. In contrast, by using direct-to-bank orchestration with VyaparGateway:

• You link your verified commercial merchant account.
• You pay 0% transaction fees on UPI payments.
• Your customers pay the clean, honest listed price without hidden surprises.

Calculate your exact savings with our Payment Gateway Fee Calculator.