Supreme Court Declines Stay on UPI MDR Above ₹2,000, Demands Answers from Centre, RBI, and NPCI

The Supreme Court of India has declined to grant an interim stay on the Union Government's decision to introduce a Merchant Discount Rate (MDR) on specified Unified Payments Interface (UPI) commercial transactions above ₹2,000. A three-judge bench comprising Chief Justice of India Surya Kant, Justice Joymalya Bagchi, and Justice V. Mohana directed the Centre, the Reserve Bank of India (RBI), and the National Payments Corporation of India (NPCI) to submit detailed counter-affidavits within four weeks.

The court was hearing a Public Interest Litigation (PIL) filed by advocate Anjan Datta challenging Gazette notifications issued by the Union Ministry of Finance on September 14 and 15. The petition contended that permitting an MDR on UPI commercial transactions lacks statutory authority, imposes an indirect burden on ordinary citizens, and risks driving businesses back toward cash dealings.

Bench Questions the Character of the Levy

During the proceedings, the bench closely questioned the executive mandate behind imposing the transaction charge. Justice Bagchi sought clarity on the statutory character of the collection:

“Is it tax or a fee? If not a fee, what is the executive basis for making this expropriation? What is the service?”

Justice Bagchi also drew attention to Section 269SU of the Income Tax Act, which mandates certain commercial entities with higher turnovers to provide electronic payment facilities to customers, asking what the legal incidence and recipient structure of the charge would be.

Chief Justice Surya Kant noted that while the question involves administrative and systemic facets, the Centre must place the full factual matrix on record:

“We need these facts on affidavit. It's more of a technical issue”.

Centre Defends Settlement Mechanism

Representing the Union Government, Additional Solicitor General (ASG) N. Venkataraman defended the framework, submitting that the MDR is neither a tax nor a government fee. He emphasized that the government does not take a single rupee from the charge; rather, it functions as a private settlement fee shared between issuing banks, acquiring banks, third-party application providers (TPAPs), and payment aggregators to sustain the operational and technological costs of handling electronic transactions.

ASG Venkataraman also stated that approximately 96% of all merchant transactions across India will remain completely insulated from the new levy.

Key Components of the October 15 Framework

Under the framework scheduled to take effect from October 15, everyday transactions and smaller businesses are ring-fenced from payment processing charges:

• Person-to-Person (P2P) Transfers: All transfers between individuals remain completely free of any fee, regardless of value.
• General Person-to-Merchant (P2M): A standard 0.4% MDR will apply solely on merchant transactions exceeding ₹2,000, with total charges capped at ₹300 for payments of ₹75,000 and above.
• Small Merchants Protection: Merchants receiving up to ₹1,00,000 per month through UPI QR codes under the P2PM category continue to enjoy zero MDR.
• Essential and Regulated Sectors: Transactions in sectors such as fuel, railways, utilities, telecom, insurance, and agricultural inputs will face a flat fee of ₹5 per transaction above ₹2,000.
• Capital Market Transactions: Payments towards mutual funds, securities, and registered stockbrokers will carry an MDR of 0.02%, capped at ₹300.

Market Implications for Banks and Fintechs

The Supreme Court’s refusal to stay the notification marks a crucial shift for India's digital payment ecosystem, which has operated under a zero-MDR mandate for UPI since early 2020. Commercial lenders—including State Bank of India, HDFC Bank, ICICI Bank, and Axis Bank—along with non-bank payment facilitators have long argued that zero-MDR restricted their ability to invest in digital security, server capacity, and processing redundancy.

While the Finance Ministry has instructed banks to ensure that merchants do not pass these costs directly to retail customers and prohibited application providers from imposing hidden consumer platform fees, trade bodies have expressed concerns that high-volume merchants with thin profit margins could adjust pricing or demand alternative settlement methods.

With the framework remaining on track for rollout on October 15, the responses from the Centre, RBI, and NPCI within four weeks will determine the long-term regulatory architecture governing digital payment monetization in India.

Tags: Supreme Court of India Reserve Bank of India National Payments Corporation of India Ministry of Finance Banking Sector Fintech