Supreme Court examines new UPI charge framework ahead of October 15 rollout. (Img: Pinterest)
New Delhi: India’s digital payment ecosystem entered a crucial phase of legal examination on Monday after the Supreme Court issued notices to the Union government, the Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI) over the proposed Merchant Discount Rate (MDR) on selected UPI merchant transactions above Rs 2,000.
The Bench of Chief Justice of India Surya Kant, Justice Joymalya Bagchi and Justice V Mohana passed the order on a public interest litigation challenging the new framework. While refusing to stay the implementation scheduled from October 15, the Apex Court, however, directed the Centre, RBI and NPCI to submit detailed responses within four weeks, bringing the future of UPI transaction charges under judicial review.
The development attracted nationwide attention as UPI has become the backbone of India’s digital payment revolution, connecting millions of consumers, shopkeepers, businesses and service providers through instant transactions. Any change in its cost structure could impact merchants, payment service providers and the broader digital economy.
For nearly six years, UPI payments operated under a zero-MDR structure, helping accelerate digital transactions across India. The new framework introduces a 0.4% MDR on specified person-to-merchant (P2M) UPI payments above Rs 2,000 from October 15.
Merchant Discount Rate is a transaction processing charge within the payment ecosystem. It is paid to entities involved in completing digital payments, including banks and payment service providers. The government has maintained that MDR is neither a tax nor a revenue collection mechanism for the Centre.
The framework does not apply to person-to-person (P2P) UPI transfers, which will continue to remain free irrespective of transaction value. Payments covered under zero-MDR provisions for small merchants will also remain outside the charge structure.
## Supreme Court Seeks Explanation on Legal Basis of MDR
During the hearing, the Supreme Court examined questions related to the nature, source and implementation mechanism of the new charge structure.
The bench sought clarity on whether the MDR framework represented a service-related commercial arrangement or required a different legal basis. The court observed that the matter involved significant technical aspects related to payment systems and asked the authorities to provide detailed information through affidavits.
The Centre informed the court that the charges would not be collected by the government and would remain within the digital payment settlement ecosystem involving banks and payment service providers.
The government argued that the framework was aimed at supporting the sustainability of digital payment infrastructure while ensuring that ordinary users and small merchants are protected.
## What Is the New MDR Structure?
Under the revised framework, eligible person-to-merchant UPI transactions above Rs 2,000 will attract a 0.4% MDR.
For large transactions above Rs 75,000, the charge has been capped at Rs 300. Certain essential and low-margin sectors, including railways, telecom services, insurance, fuel and agricultural inputs, will have a fixed MDR of Rs 5 on qualifying transactions.
Transactions related to mutual funds, securities, stockbrokers and dealers will attract a lower MDR rate of 0.02%, subject to a maximum cap of Rs 300.
The government has also clarified that UPI platforms will not be permitted to impose separate platform fees or hidden charges on users.
## Petition Challenges UPI MDR Framework
The Supreme Court hearing came after a petition filed by advocate Anjan Datta challenged the MDR framework and related notifications issued by the Finance Ministry in September 2026.
The petition questioned the legal validity of imposing charges on selected UPI merchant payments and raised concerns about transparency, consultation and possible economic impact on businesses.
The plea argued that small traders and businesses operating with limited profit margins could face additional financial pressure. It also highlighted concerns that merchants may indirectly transfer additional costs to consumers or discourage digital payment acceptance.
The petitioner also raised questions over the difference between UPI payments and RuPay debit card transactions, seeking greater clarity on the policy approach.
The petition requested stronger safeguards, including transparency in cost calculations, impact assessment and measures to prevent unfair financial burden on merchants.
## Government Says 96% Transactions Will Remain Unaffected
The Centre has stated that the majority of UPI users will continue to access free digital payments.
According to the government’s submission before the Supreme Court, around 96% of users and transactions will remain outside the MDR framework due to exemptions, transaction limits and zero-charge provisions.
Officials have also maintained that small merchants, person-to-person transfers and essential service categories have been protected through specific safeguards.
The government has advised payment platforms and banks to ensure that MDR costs are not directly passed on to customers.
## Merchant Groups Raise Concerns Over Added Costs
The proposed MDR system has triggered concerns among sections of the merchant community, especially small retailers who rely heavily on UPI payments for daily business operations.
Merchant organisations have argued that even a small percentage-based charge could affect businesses working with narrow profit margins. Some industry groups have also announced symbolic protests against the proposed framework, citing concerns over the future affordability of digital payments.
The debate has highlighted the challenge of maintaining India’s rapid digital payment growth while ensuring financial sustainability for payment infrastructure providers.
## Bigger Impact on India’s Digital Payment Future
The Supreme Court proceedings have placed India’s UPI ecosystem at the centre of a larger discussion over digital payment regulation, merchant economics and technology-driven financial inclusion.
UPI has played a major role in expanding cashless transactions across urban and rural India. The outcome of the legal challenge could influence how transaction costs are structured in one of the world’s largest real-time payment networks.
For now, the October 15 implementation timeline remains unchanged. The next stage of the case will depend on the responses filed by the Centre, RBI and NPCI before the Supreme Court.
