UPI Payments for Shop Owners: Charges, Refunds & Settlement

UPI payments for shop owners involve merchant discount rate (MDR) charges, refund timelines, and settlement cycles that differ from regular customer-to-customer transfers. This article explains what shop owners pay, how refunds work, and when settled funds actually reach their bank accounts.

Formula

The merchant discount rate (MDR) is the fee a shop owner pays per UPI transaction. It is calculated as:

MDR charge = Transaction amount × MDR rate / 100

Net credit = Transaction amount − MDR charge

• Transaction amount – the total billed to the customer (in ₹).
• MDR rate – the percentage fee charged by the payment gateway or bank (typically 0%–1.5% for UPI).
• Net credit – the amount actually deposited into the shop owner’s bank account after the fee is deducted.

Worked Example

Using the default values: a transaction of ₹1,000 with an MDR rate of 1.0%.

1. MDR charge = 1000 × 1.0 / 100 = ₹10.00
2. Net credit = 1000 − 10 = ₹990.00

So the shop owner receives ₹990 for a ₹1,000 sale. The ₹10 is the merchant discount fee.

Background: How UPI Merchant Payments Work

UPI (Unified Payments Interface) was launched in 2016 by the National Payments Corporation of India (NPCI). Initially, UPI was free for all users, including merchants. In 2020, the government mandated that UPI transactions above ₹50 would attract an MDR of up to 1.15% for merchants, but this was later revised. As of 2023, UPI transactions below ₹2,000 are free for merchants, while those above ₹2,000 may attract an MDR of around 1%–1.5%, depending on the bank and the payment service provider. However, many small shop owners using UPI apps like PhonePe, Google Pay, or Paytm do not pay MDR because the apps often absorb the cost or the merchant is on a zero-MDR plan. The exact charges depend on the merchant’s agreement with their bank or payment aggregator.

Charges for Shop Owners

Shop owners generally pay two types of charges: the MDR (if applicable) and possibly a setup or subscription fee for a payment gateway. For UPI, the MDR is the main cost. Here are the typical scenarios:

• UPI transactions below ₹2,000 – No MDR is charged to the merchant, as per current RBI guidelines.
• UPI transactions above ₹2,000 – MDR may be 1%–1.5% of the transaction amount, but many aggregators offer zero MDR for small businesses.
• QR code static UPI – Often free for merchants, with no monthly rental, but may have a cap on transaction volume.
• Dynamic QR or POS-based UPI – May have a small rental fee or higher MDR, but these are less common for small shops.

It’s crucial to check your bank statement: if you see a deduction labeled “MDR� or “merchant fee,� that is the charge. Some banks also charge a monthly rental for the QR code or a payment gateway subscription.

Refund Timelines

When a customer requests a refund for a UPI payment, the process is not instant. The refund goes through the same UPI network, and the time depends on the merchant’s and customer’s banks. Typically:

• Same-day refunds – If the merchant initiates the refund before the settlement, the money may be reversed within a few hours.
• 1-3 business days – Most refunds are processed within 1-3 business days after the merchant approves the refund request.
• Failed transactions – If a UPI transaction fails but money is debited, the auto-refund usually happens within 5 business days, though many banks do it within 24 hours.

For shop owners, the refund amount is deducted from their settlement, so they do not lose money beyond the returned goods. However, if the refund is initiated after the daily settlement, the money is deducted from the next day’s settlement.

Settlement Times

Settlement is the process where the money from UPI transactions is transferred from the payment aggregator to the shop owner’s bank account. Settlement times vary:

• Same-day settlement – Some large payment providers offer same-day settlement for an additional fee, usually within a few hours of the transaction.
• T+1 settlement – The most common: transactions made on Day 1 are settled by the next business day (Day 2). For example, a sale on Monday is credited on Tuesday.
• T+2 settlement – Some banks take two business days, especially for new merchants or those with high-risk profiles.

Weekends and public holidays delay settlements because banks do not process transfers on those days. A transaction on Friday may not be settled until Monday or Tuesday.

Common Problems and Misconceptions

Shop owners often face confusion about settlement and refunds. Here are common issues:

• “Where is my money?â€� – If the settlement is delayed, check if the transaction was successful and if the bank holiday is the cause. Contact your payment provider’s support with the transaction ID.
• “Why was I charged MDR?â€� – MDR applies only to transactions above ₹2,000 and only if your merchant agreement includes it. Many small shops are on zero-MDR plans, but if you see a charge, it’s because your bank or aggregator applies it.
• “Refund not received by customerâ€� – Refunds take time; if the customer hasn’t received it after 5 business days, the merchant should raise a complaint with the UPI app or bank.
• “Settlement amount is less than expectedâ€� – This is usually due to MDR deductions or refunds processed that day. Check the settlement report for a breakdown.

How to Choose a UPI Payment Provider

When selecting a UPI payment solution for your shop, consider these factors:

• MDR charges – Compare the MDR rates for transactions above ₹2,000. Some providers offer zero MDR for small businesses.
• Settlement speed – If you need daily cash flow, look for providers offering same-day settlement (even at a fee).
• QR code cost – Static QR codes are usually free, but dynamic QR codes may have a rental fee.
• Customer support – Ensure the provider has a reliable helpline for disputes and refunds.
• Integration with billing – If you use a billing software, check if the UPI solution integrates seamlessly.

Always read the merchant agreement carefully to understand all fees, including hidden charges like monthly maintenance or transaction limits.

Safety and Security

UPI is generally safe, but shop owners should follow security practices:

• Verify the payment – Always check the UPI app or SMS for the credit confirmation before handing over goods.
• Use your own QR code – Ensure the QR code displayed is yours; tampered codes can redirect payments to fraudsters.
• Keep the app updated – Updates fix security vulnerabilities.
• Never share your UPI PIN or OTP – Even with bank officials.
• Report suspicious transactions – Immediately contact your bank or the UPI app’s support if you notice any unauthorized debit.

Also, be aware of “refund scams� where a customer claims a refund but never made a payment. Always check your settlement report before processing refunds.

Frequently Asked Questions

Do shop owners pay charges for UPI payments?

Yes, but only for transactions above ₹2,000, and only if the merchant agreement includes MDR. Many small businesses are on zero-MDR plans, so they pay nothing. Always check your settlement report for deductions.

How long does a UPI refund take for a shop owner?

Refunds are processed within 1-3 business days after the merchant initiates them. Failed transactions auto-refund within 5 business days, but often sooner. The refund is deducted from the merchant’s next settlement.

When does the money from UPI sales reach my bank account?

Most UPI settlements are T+1, meaning the money is credited the next business day. Some providers offer same-day settlement for a fee. Weekends and holidays delay settlements.

What is MDR in UPI?

Merchant Discount Rate is a fee charged to the merchant for processing a UPI payment. It is a percentage of the transaction amount, usually 0%–1.5%. For UPI, it is waived for transactions below ₹2,000.

Can I get a refund of MDR charges?

No, MDR is a legitimate fee charged by the payment provider. However, if you were charged MDR on a transaction below ₹2,000, you can dispute it with your bank or aggregator as it violates current guidelines.

What should I do if my settlement is delayed?

First, check if the delay is due to a bank holiday. If not, contact your payment provider’s support with the transaction ID. Delays beyond 2 business days should be escalated to the NPCI or your bank.

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in t | Transaction amount | ₹ | 1000 | 0
in m | MDR rate | % | 1.0 | 0
out charge | MDR charge | ₹ | t * m / 100 | 2
out net | Amount credited | ₹ | t - t * m / 100 | 2