Supreme Court Seeks Centre and RBI Response on UPI Merchant Discount Rate Challenge — September 28, 2026

The Supreme Court of India has sought responses from the Central Government, the Reserve Bank of India (RBI), and the National Payments Corporation of India (NPCI) on a Public Interest Litigation (PIL) challenging the imposition of a Merchant Discount Rate (MDR) on specified Unified Payments Interface (UPI) transactions exceeding Rs 2,000.

A three-judge bench comprising Chief Justice of India Surya Kant, Justice Joymalya Bagchi, and Justice V. Mohana declined to grant an interim stay on the government's decision, allowing the operational rollout scheduled for October 15, 2026, to proceed as planned. The apex court directed the respondents to file their counter-affidavits within four weeks.

The Legal Challenge

The petition, filed by advocate Anjan Datta, challenges the Ministry of Finance's notifications issued under Section 10A of the Payment and Settlement Systems Act, 2007. The petitioner contends that introducing commercial MDR on UPI transactions was done without adequate statutory safeguards, empirical transparency, or public consultation. The plea further argues that merchants operating on thin margins may either pass on costs indirectly to consumers, refuse digital payments, or split transactions, potentially harming digital adoption and increasing cash dependence.

During the hearing, when the petitioner's counsel pushed for an immediate freeze on the charges, the bench refused the request, remarking that the matter is "less a legal and more a technical issue".

Appearing for the Centre, Additional Solicitor General N. Venkataraman defended the framework, asserting that the MDR is neither a tax nor a statutory government fee. Instead, it functions as an ecosystem settlement charge to cover operating infrastructure costs incurred by acquiring banks and payment service providers, facilitated by the NPCI. He emphasized to the court that roughly 96% of users and transactions on the gateway will remain completely unaffected and exempt from the fee.

Key Mechanics of the UPI MDR Policy

The revised framework modifies the zero-MDR regime that had governed UPI transactions for nearly six years.

Structure of the New MDR Framework:

• General Commercial Payments: A 0.4% MDR applies to eligible person-to-merchant (P2M) transactions above Rs 2,000, capped at a maximum of Rs 300 per transaction for receipts of Rs 75,000 and above.
• Everyday and Small Payments Ring-Fenced: All person-to-person (P2P) transfers remain completely free of charge, regardless of value. P2M transactions up to Rs 2,000 also continue to carry zero MDR.
• Small Merchant Protection: Merchants recording receipts of up to Rs 1 lakh per month through UPI QR codes into their bank accounts remain fully exempt from the levy.
• Essential Services: Utility and thin-margin sectors—including railways, telecommunications, insurance, fuel stations, and agricultural inputs—are subject to a flat fee of Rs 5 per transaction exceeding Rs 2,000.
• Capital Market Transactions: Inflows into mutual funds, securities, and stockbroker accounts attract a reduced MDR of 0.02%, capped at Rs 300.

Implications for Fintechs and Banks

The refusal of the apex court to stay implementation clears the path for payment aggregators, banks, and merchant acquiring platforms to generate direct transaction revenues from high-ticket commercial UPI volumes starting mid-October. For years, commercial banks and payment aggregators have lobbied authorities for revenue recovery mechanisms to fund backend infrastructure, cybersecurity upgrades, and server bandwidth handling billions of monthly payments.

While the court will review whether the administrative mechanism aligns with the Payment and Settlement Systems Act, the refusal to stay the rollout provides operational clarity for digital payment platforms preparing billing configurations ahead of the deadline.

Tags: Supreme Court of India Reserve Bank of India NPCI Ministry of Finance UPI Digital Payments