UPI Merchant Charges: NPCI’s Supreme Court Defence and the Zero-MDR Trade-off
Revise the static topic: UPSC Economy notes
In short: NPCI has defended before the Supreme Court a reported framework imposing merchant discount rate charges of up to 0.4% on UPI person-to-merchant transactions above ₹2,000, arguing that universal zero MDR is financially unsustainable. According to its submission, person-to-person transfers and merchant payments up to ₹2,000 remain free. The dispute concerns how to finance payment infrastructure and cybersecurity without undermining affordability, merchant acceptance and legal safeguards.
Reference illustration of UPI digital payments, which enable real-time money transfers. The dispute concerns how merchant-payment charges should fund the system while preserving affordability.
Image: PoojithaSowmiya · CC BY-SA 4.0
Why in news
The Hindu reports that NPCI has submitted an affidavit defending the government’s decision to introduce differentiated UPI merchant charges through a September notification. The supplied report describes arguments before the Supreme Court, not a final judicial ruling.
0.4%
Reported maximum MDR on eligible P2M payments
₹2,000
Reported P2M exemption threshold
96%
P2M transactions unaffected, according to NPCI
24.51 billion
UPI transactions in August 2026
₹2,000 crore
Reported zero-MDR support allocation for 2026–27
11%
Industry costs covered by allocation, as cited
Background
The Unified Payments Interface is an interoperable, instant payment system developed by the National Payments Corporation of India. NPCI operates retail payment infrastructure within the regulatory framework overseen by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007. Merchant discount rate is a charge borne by a merchant for accepting a payment; it is distinct from a charge levied directly on an individual sending money. Zero-MDR arrangements can encourage digital acceptance, but processing, fraud prevention, customer support and infrastructure maintenance still entail costs that must be financed by ecosystem participants, public support or other revenues.
What NPCI has defended
According to the report, the challenged framework applies an MDR not exceeding 0.4% to person-to-merchant UPI transactions above ₹2,000. NPCI says merchant payments up to ₹2,000 and all person-to-person transfers remain free, with no transaction or platform fee permissible for individuals sending or receiving money.
NPCI argues that the framework protects everyday payments while drawing revenue from higher-value commerce. Its claim that approximately 96% of P2M transactions remain unaffected concerns transaction count; it does not establish the exempt share of merchant-payment value or the proportion of merchants unaffected.
- P2P transfers account for 70% of total UPI transaction value, according to NPCI’s submission.
- Approximately 4% of merchant transactions would attract MDR, according to NPCI.
- The supplied report does not establish that the Supreme Court has upheld the framework.
Infographic
Affordable access
Protect personal transfers and routine low-value merchant payments.
Proportionate funding
Assess differentiated MDR against efficient, verified ecosystem costs.
Legal authority
Ensure the charging framework conforms to statute and RBI oversight.
Merchant confidence
Disclose deductions and monitor effects on margins and acceptance.
Resilience
Connect financing to security, uptime and customer protection.
AI-assisted infographic by Pragnya IAS Academy, based on the cited sources.
Why zero price does not mean zero cost
NPCI links its financing argument to UPI’s expanding scale. It reports approximately 241.62 billion transactions worth ₹314 lakh crore in financial year 2025–26, with August 2026 recording its highest-ever monthly transaction volume. Such usage requires processing capacity, operational continuity, cybersecurity and effective dispute handling.
The affidavit cites the Standing Committee on Finance as observing that the ₹2,000 crore allocation for 2026–27 covered only 11% of industry costs and 14% of potential MDR collections. These are reported committee findings cited by NPCI, not an independently established measure of the economically appropriate MDR.
The policy choice is therefore about who pays and through which mechanism. General taxation spreads costs across the public, while merchant charges link part of the funding to commercial use. Neither option automatically guarantees efficient expenditure or better service.
- NPCI identifies IT infrastructure, cybersecurity, risk management, onboarding, customer service and liability-related expenditure as operating costs.
- The report says government incentive schemes have supported the zero-MDR regime since 2021–22.
- Higher transaction volumes can increase capacity requirements while also permitting economies of scale; pricing should reflect both.
Legal issue: a service charge or an impermissible levy?
The petitioners contend that the amended framework required legislation rather than a notification. NPCI responds that MDR is a cost-recovery charge distributed among payment-system participants, not a tax, cess, duty or statutory levy. This is its legal argument, not a judicial determination.
Section 10A of the Payment and Settlement Systems Act, 2007 concerns the prohibition of charges on users of prescribed electronic payment modes. The report attributes to NPCI a threshold-based interpretation protecting UPI transactions below ₹2,000. The precise legal basis for the reported differentiation must be assessed against the operative statutory text, prescribed modes and notification; the affidavit’s interpretation should not be treated as settled law.
Calling a payment a commercial charge does not by itself establish authority to impose it. The central questions are whether the framework is consistent with statutory prohibitions, whether the notification stays within its legal authority, and how NPCI’s operating role interacts with RBI oversight.
- Economic necessity can justify policy reconsideration but cannot override an applicable statute.
- Industry endorsement supports stakeholder consultation but does not establish legal validity.
- A defensible framework needs both a clear legal foundation and a transparent cost rationale.
Affordability, merchant behaviour and financial stability
A differentiated MDR can preserve low-value access while creating a recurring funding stream. However, transaction value is an imperfect proxy for a merchant’s capacity to pay: a higher-value sale may still carry a narrow profit margin.
Although merchants formally bear MDR, they may absorb it, adjust prices or encourage other payment methods. Thus, freedom from a direct customer transaction fee does not necessarily mean freedom from an indirect economic burden.
Reliable financing could support redundancy, fraud controls and customer protection. These benefits are not automatic: revenue allocation, service standards and accountability are necessary to ensure that additional collections strengthen the payment system rather than merely expand participant revenues.
- A threshold may create incentives to split transactions or shift eligible payments to cash.
- Broad exemptions reduce direct exposure but do not eliminate sector-specific or low-margin merchant concerns.
- Pricing uncertainty can weaken merchant confidence and investment in digital acceptance.
| Transaction category | Reported treatment | Analytical implication |
|---|---|---|
| Person-to-person transfer | Free irrespective of amount | Protects personal transfers; NPCI says these constitute 70% of total UPI value. |
| Person-to-merchant payment up to ₹2,000 | No MDR | Protects low-value acceptance and routine payments. |
| Person-to-merchant payment above ₹2,000 | MDR not exceeding 0.4% | Creates merchant-funded revenue but may affect margins and payment choices. |
| Individual sending or receiving money | No transaction or platform fee, according to NPCI | Direct customer protection does not rule out indirect price effects. |
- 1. Identify an eligible P2M payment under legally valid rules.
- 2. Apply the disclosed merchant charge while preserving mandated exemptions.
- 3. Allocate receipts among ecosystem participants through transparent rules.
- 4. Link financing to processing capacity, cybersecurity, resilience and customer protection.
- 5. Review costs, service performance and effects on merchant acceptance.
2007
The Payment and Settlement Systems Act established the statutory framework for payment-system regulation and supervision.
2021–22 onwards
According to NPCI, government incentive schemes supported the costs of the zero-MDR regime.
Financial year 2025–26
NPCI reports approximately 241.62 billion UPI transactions worth approximately ₹314 lakh crore.
August 2026
UPI processed 24.51 billion transactions worth approximately ₹29.82 lakh crore, according to the report.
September, as reported
A notification introduced the differentiated MDR framework now under challenge.
Current proceedings
NPCI defended the framework before the Supreme Court; the supplied report contains no final verdict.
Significance, challenges & way forward
Significance
- The dispute shifts attention from maximising transaction growth to financing dependable digital payment infrastructure.
- Protecting low-value payments can preserve UPI’s inclusion benefits while allowing differentiated commercial cost recovery.
- Predictable funding could support cybersecurity, operational redundancy and grievance resolution.
- The case highlights the distinction between an economically desirable reform and a legally authorised one.
- Transparent cost sharing can make public support more targeted and fiscally accountable.
Challenges
- Low-margin merchants may find even a limited ad valorem charge commercially significant.
- Merchant price adjustments or payment steering could indirectly affect consumers despite the absence of direct user fees.
- Industry-wide cost estimates require scrutiny before being used to justify a particular rate.
- A transaction-value threshold can encourage payment splitting and does not reliably identify merchant size.
- Additional revenue may not improve resilience unless expenditure and service outcomes are monitored.
- Uncertainty over statutory authority can undermine confidence in the charging framework.
Way forward
- Clarify the statutory basis of the framework and use legislative amendment where required rather than relying on an inconsistent notification.
- Publish disaggregated, independently scrutinised cost evidence to distinguish efficient operating expenditure from avoidable costs.
- Preserve accessible low-value payments and assess whether vulnerable merchants need targeted support beyond a transaction threshold.
- Disclose MDR applicability, settlement deductions and grievance channels clearly to merchants.
- Link revenue arrangements to measurable reliability, fraud-management and customer-service outcomes without prescribing unsupported spending quotas.
- Monitor merchant acceptance, indirect consumer costs, transaction splitting and shifts towards cash.
- Periodically review charges and incentives as scale, technology and operating costs change.
Key terms
- Merchant discount rate
- A charge borne by a merchant for accepting a payment, generally expressed as a proportion of the transaction value.
- P2M
- Person-to-merchant payment made to a merchant for goods or services.
- P2P
- Person-to-person transfer between individuals.
- Zero MDR
- An arrangement in which no merchant discount rate is charged, although the underlying payment service still has operating costs.
- Economic incidence
- The ultimate distribution of a cost after participants adjust prices and behaviour, distinct from who formally pays.
- Operational resilience
- The ability of a payment system to maintain or restore critical services during disruptions.
- Delegated legislation
- Rules or notifications issued under authority granted by a parent statute, subject to that statute’s limits.
- Network effects
- Benefits that increase as more users and merchants participate in a payment network.
Link with static syllabus
Prelims practice MCQs
Q1. With reference to merchant discount rate, consider the following statements: 1. It is a charge borne by a merchant for accepting a payment. 2. Zero MDR implies that processing the underlying payment entails no operating cost. 3. A merchant may indirectly transfer some payment-acceptance costs through prices. Which of the statements given above are correct?
Q2. According to the framework described in NPCI’s submission in the supplied report, which of the following payments would be eligible for MDR?
Q3. Consider the following statements about payment-system governance in India: 1. NPCI operates UPI. 2. RBI regulates and supervises payment systems under the Payment and Settlement Systems Act, 2007. 3. Endorsement by payment applications is sufficient to override a statutory prohibition. Which of the statements given above are correct?
Q4. NPCI’s reported claim that approximately 96% of P2M transactions remain unaffected by MDR directly indicates which of the following?
Mains practice questions
GS 3 · 15 marks · 250 words
Affordable digital payments require financially sustainable infrastructure. In the context of the UPI merchant discount rate debate, examine how India can reconcile inclusion, cost recovery and regulatory legitimacy.
Frequently asked questions
Has the Supreme Court approved UPI merchant charges?
The supplied report does not record a final approval or judgment. It describes NPCI’s affidavit defending the challenged framework.
Would all UPI payments attract MDR under the reported framework?
No. NPCI says only P2M payments above ₹2,000 would attract MDR of up to 0.4%, while P2P transfers and P2M payments up to ₹2,000 would remain free.
Why does NPCI consider universal zero MDR unsustainable?
NPCI argues that rising payment volumes require greater spending on infrastructure, cybersecurity, resilience and customer services. It says public incentives do not adequately cover these costs.
Is MDR a tax?
MDR is ordinarily a merchant payment-acceptance charge, and NPCI argues that this framework involves cost recovery rather than taxation. That characterisation does not by itself settle whether the charge is permitted under the applicable law.
Sources
Analysis prepared by the Pragnya IAS Academy current-affairs desk with AI assistance from the cited reports. Verify figures with the original sources.
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