New Delhi: The National Payments Corporation of India (NPCI) has told the Supreme Court that the revised Merchant Discount Rate (MDR) framework is necessary to sustain the Unified Payments Interface (UPI) ecosystem, while maintaining that merchants will not be allowed to pass on the charges to customers.
In its counter-affidavit filed in Anjan Datta v. Union of India, NPCI has defended the framework for person-to-merchant (P2M) UPI transactions, arguing that the charges are limited to a small proportion of transactions above Rs 2,000 and are intended to meet the costs of maintaining the digital payments infrastructure.
The response comes in a petition challenging the 2026 amendment to Section 10A of the Payment and Settlement Systems Act, the subsequent finance ministry notification and NPCI’s revised MDR framework. The Supreme Court had declined to stay the framework and sought responses from the Centre, the Reserve Bank of India and NPCI.
The petitioner has questioned the decision to introduce charges on certain UPI transactions, arguing that the framework is arbitrary and could increase the burden on merchants, who may eventually pass on the additional cost to consumers.
It has also questioned the basis on which different transaction values and merchant categories have been treated differently.
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‘96% of merchant transactions will remain free’
NPCI has argued that the zero-MDR regime has created a gap between the cost of operating UPI and the revenue available to sustain it. It said the system requires continued investment in payment infrastructure, cybersecurity, fraud prevention, technological innovation and customer services, particularly as transaction volumes continue to grow.
The corporation has also pointed out that person-to-person (P2P) transfers account for 37 percent of UPI transaction volume and 70 percent of its transaction value. These transactions will continue to remain free, irrespective of the amount.
Under the revised framework, P2P transactions will not attract MDR. Small merchants receiving monthly inward UPI credits of up to Rs 1 lakh will also continue to be exempt.
For eligible P2M transactions above Rs 2,000, the MDR has been capped at 0.4 per cent, subject to a maximum of Rs 300. Separate rates have been prescribed for certain categories, including capital market transactions, while specified essential and low-margin sectors will attract a flat charge of Rs 5 on eligible transactions above Rs 2,000.
NPCI has maintained that approximately 96 per cent of P2M transactions will remain unaffected, with only around 4 per cent attracting MDR. It has further argued that the 0.4 per cent ceiling is substantially lower than the charges imposed by payment-system providers on credit and debit card transactions.
NPCI has also proposed a dedicated fund for small merchants with an annual turnover of up to Rs 20 lakh. The fund would be financed through a 5 per cent contribution from each participating entity’s share of the MDR. This means the contribution would come from the revenue allocated to banks and other entities in the payment system, and not through an additional charge on merchants or customers. Specified industry-programme categories would be exempt from the contribution.
Merchants cannot pass on charges to customers
Addressing concerns that the additional cost could eventually be borne by consumers, NPCI has maintained that merchants will not be permitted to pass on MDR to customers.
It has argued that banks and payment service providers are contractually bound to ensure compliance with this restriction. NPCI’s contractual arrangements and service-level obligations require participating entities to follow its circulars, with non-compliance potentially attracting action, including termination of UPI membership or facilities.
NPCI has also said that UPI application providers cannot impose platform fees or other charges on users for making UPI payments.
The corporation has argued that the limited application of MDR leaves little scope for merchants to revise prices across their entire customer base, since the charge would apply only to a small proportion of high-value transactions.
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NPCI’s legal defence
On the legal challenge, NPCI has relied on Sections 20 and 21 of the Payment and Settlement Systems Act to defend its authority to determine the terms and charges governing the operation of a payment system. It has argued that, as the Reserve Bank of India-authorised system provider for UPI, it is empowered to prescribe the applicable charges and their distribution among participating entities.
NPCI has also contended that the statutory prohibition on imposing charges does not extend to all UPI transactions under the amended framework. It has relied on the finance ministry’s notification of 14 September 2026, which provides for zero charges on RuPay debit card transactions without a monetary ceiling and on UPI transactions up to Rs 2,000.
It has argued that UPI transactions above Rs 2,000 are therefore not covered by the same statutory prohibition.
The corporation has further disputed the petitioner’s argument of violation of fundamental rights, arguing that it should not be treated as ‘State’ within the meaning of Article 12 of the Constitution. It has described itself as a not-for-profit company with shareholding from banks and other entities, and it is not under direct government control.
NPCI has also argued that MDR is a commercial charge for payment-system services and not a tax or fiscal levy. The amount, it says, is distributed among entities involved in processing and settling transactions.
NPCI has sought to counter the petitioner’s contention that the revised MDR structure violates the right to equality under Article 14 and the freedom to practice any profession or carry on a trade or business under Article 19(1)(g) of the Constitution, it has argued that the classification of UPI transactions based on their value and the category of merchant is reasonable and has a legitimate objective. It has maintained that the framework seeks to protect small merchants and ensure that low-value transactions remain free, while allowing charges on certain higher-value transactions.
The corporation has also referred to Parliamentary Standing Committee reports on the need for a sustainable funding model for digital payments, arguing that the ecosystem cannot indefinitely depend on government support.
Although the revised framework was initially scheduled to take effect from 15 October, its implementation has been postponed.
The Supreme Court will now consider the responses to the petition. The central question is whether NPCI’s interpretation of its statutory powers and the safeguards built into the revised MDR framework can withstand the constitutional challenge.
Aditya Edara is a TPSJ alum, currently interning with ThePrint.
(Edited by Nardeep Singh Dahiya)
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