Under Section 34 of the Income Tax Act, 2025, expenses incurred directly for business purposes can be deducted, providing a legal basis for this claim

Merchant discount rate (MDR) fees can be considered tax-deductible business expense. Experts say there is legal backing to treat such charges as business expenses.

Based on FAQs by NPCI, a merchant accepting a digital payment will need to pay a certain sum to banks and payment service providers for processing a digital payment. The question then arises, as this payout is in furtherance of business, should this be treated as business income for income tax purpose?

Section 34 of the Income Tax Act, 2025, governs general business expenditure deductions. The provision provides that expenses laid out completely for business or profession purposes are allowed when computing profits and gains. Based on this, experts say MDR can be considered as business expense.

According to Deepesh Chheda, Partner at Dhruva Advisor, MDR works much like the fees businesses already pay for accepting card payments or using online payment gateways. It is not a government tax or duty, and that distinction matters, because taxes and duties are often not deductible. “Since MDR is paid to a bank for a service, not to the government as a tax, it should normally qualify as an ordinary, deductible business expense, just like rent, salaries, or other regular costs of doing business,” he said.

 Richa Sawhney, Partner at Grant Thornton Bharat, said from a taxation perspective, MDR is comparable to other transaction-processing and banking charges incurred in the ordinary course of business.

“Its close nexus with business operations supports the view that it should ordinarily qualify as a deductible business expenditure under the general deduction provisions,” she said.

Vishal Gada, Founder and CEO of Aurtus, said since the deduction reduces taxable profits, the effective cost of MDR falls by the applicable tax rate. For example, “a company taxed at about 25 per cent would bear only around three-fourths of the MDR in real terms,” he said.

Rahul Jain, Partner at Khaitan & Co, said similar bank fees or payment collection or realisation charges have been treated as tax deductible in the past and hence, “this is a settled position in law”.

Published on September 16, 2026