# NPCI tells Supreme Court zero-MDR UPI is unsustainable, defends 0.4% merchant fee

URL: https://upsc.help/current-affairs/2026-11-06/npci-upi-mdr-sc-affidavit/
Date: 6 November 2026 (2026-11-06)
Source: The Hindu, Page 16
UPSC papers: GS3, GS2
Publisher: upsc.help (Pratidin), free and open-source UPSC Civil Services current affairs. Not affiliated with UPSC. Every fact was checked against the source reports by a separate review before publishing.

**In one line:** NPCI has told the Supreme Court that free UPI cannot last for all payments and that a capped 0.4% fee on large merchant payments is a fair, narrow fix.

The National Payments Corporation of India (NPCI), which runs the Unified Payments Interface (UPI), has told the Supreme Court in a counter affidavit filed on 3 November 2026 that a zero merchant discount rate (MDR) on all UPI payments is unsustainable. MDR is the fee a merchant's bank charges for accepting a digital payment. The petition before the court challenges three things: the amendment of Section 10A of the Payment and Settlement Systems Act, 2007 through the Taxation and Other Laws (Amendment) Act, 2026; the Centre's notification of 14 September 2026 naming the payment modes that stay free; and NPCI's circular of 15 September 2026 that set out a revised MDR. Under the framework, an MDR not exceeding 0.4% applies only to person-to-merchant (P2M) payments above ₹2,000. The charge was meant to start on 15 October, but NPCI says it has been postponed.

NPCI's case rests on numbers. About 70% of UPI transactions are person-to-person and stay free. About 96% of P2M payments, it says, remain unaffected, and merchants with monthly UPI credits of up to ₹1 lakh stay in a zero-MDR category. It cited a parliamentary Standing Committee finding that the ₹2,000 crore budget allocation covered only 11% of industry costs, against operating costs the Finance Ministry estimated at ₹20,700 crore. Five per cent of each entity's MDR share is to fund a programme for merchants with annual turnover up to ₹20 lakh. NPCI said merchants cannot pass the charge on to customers and UPI apps cannot levy platform fees, calling this non-pass-through rule 'a mandatory and binding direction'. It called MDR a commercial charge shared among participants, not a tax, and said 0.4% is lower than card charges.

NPCI also raised a preliminary objection: as a not-for-profit company set up by the RBI and the Indian Banks' Association, it is not 'State' under Article 12, so claims under Articles 14 and 19(1)(g) cannot be enforced against it through a writ under Article 32. The petitioner's concerns, as reported, are that small merchants and street vendors will bear indirect costs and that merchants may raise prices. The background is the zero-MDR regime in force since 1 January 2020 for RuPay debit cards and UPI, under which businesses with turnover above ₹50 crore had to offer these modes free of charge. Zero-MDR incentive schemes in 2021-22 later placed a substantial financial burden on the public exchequer.

## Prelims facts

- NPCI's framework allows an MDR of up to 0.4% only on person-to-merchant UPI payments above ₹2,000.
- Person-to-person UPI transfers, about 70% of all UPI transactions, and merchants with monthly UPI credits up to ₹1 lakh stay free of MDR.
- NPCI told the Supreme Court that merchants cannot pass the MDR on to customers and UPI apps cannot charge platform fees.
- NPCI argues it is not 'State' under Article 12, so Articles 14 and 19(1)(g) cannot be enforced against it under Article 32.
- Zero MDR on RuPay debit cards and UPI has applied since 1 January 2020.

## Quick recall

- **What is the merchant discount rate?** The fee a merchant's bank charges for accepting a digital payment.
- **What is the ceiling on the new UPI MDR?** 0.4%, on person-to-merchant payments above ₹2,000.
- **What share of UPI transactions are person-to-person, per NPCI?** About 70%, and they stay free.
- **Which merchants stay in the zero-MDR category?** Those with monthly inward UPI credits of up to ₹1 lakh.
- **From when did zero MDR apply to UPI and RuPay debit cards?** 1 January 2020.
- **Under which Act is NPCI authorised?** The Payment and Settlement Systems Act, 2007.
- **Which section of the 2007 Act was amended by the Taxation and Other Laws (Amendment) Act, 2026?** Section 10A.
- **Who promoted NPCI?** The RBI and the Indian Banks' Association.

## Prelims practice question

With reference to the revised UPI merchant discount rate (MDR) framework defended by NPCI in the Supreme Court in November 2026, consider the following statements:
1. An MDR of up to 0.4% applies to all UPI payments above ₹2,000, including person-to-person transfers.
2. Merchants are not allowed to pass the MDR on to customers.
3. UPI apps are not allowed to levy platform fees on users.
Which of the statements given above are correct?

(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (b) 2 and 3 only. Statement 1 is wrong: the MDR applies only to person-to-merchant payments above ₹2,000; person-to-person transfers stay free. Statements 2 and 3 are correct: NPCI told the court the non-pass-through rule is binding and apps cannot levy platform fees.

## UPSC previous-year questions this connects to

- UPSC Prelims 2017, Prelims: Which of the following is the most likely consequence of implementing the 'Unified Payments Interface (UPI)'? (a) Mobile wallets will not be necessary for online payments. (b) Digital currency will totally replace the physical currency in about two decades. (c) FDI inflows will drastically increase. (d) Direct transfer of subsidies to poor people will become very effective. (https://upsc.help/pyq/q340-following-most-likely-consequence-implementing-unified-payments/)
- UPSC Mains 2026, GS3: Examine the view that financial inclusion is an integral part of social and economic inclusion in a country like India. Also throw light on the usefulness of the R.B.I.'s Financial Inclusion Index. (https://upsc.help/pyq/q162-view-financial-inclusion-integral-part-social-economic/)
  How to use this story in the answer: Use the UPI fee design to show how inclusion goals shape payment pricing, with small merchants and person-to-person transfers kept free.
- UPSC Mains 2022, GS3: Is inclusive growth possible under market economy? State the significance of financial inclusion in achieving economic growth in India. (https://upsc.help/pyq/q163-inclusive-growth-possible-under-market-economy-state/)
  How to use this story in the answer: Use the UPI MDR case to show that market-based digital finance can stay inclusive when pricing is targeted at larger users.

## Mains practice question

The zero merchant discount rate helped UPI grow, but its sustainability is now in question. Examine the case for and against a limited MDR on high-value UPI merchant payments. (250 words)

### Model answer

The merchant discount rate (MDR) is the fee a merchant's bank charges for accepting digital payments. UPI has run on zero MDR since 1 January 2020; in November 2026 NPCI told the Supreme Court this is unsustainable and defended a capped fee.

## The framework
- MDR of up to 0.4% only on person-to-merchant (P2M) payments above ₹2,000.
- Person-to-person transfers, about 70% of UPI transactions, and merchants with monthly UPI credits up to ₹1 lakh stay free.
- Merchants cannot pass the fee on; apps cannot levy platform fees.

## Case for a limited MDR
- **Cost gap:** the ₹2,000 crore budget allocation covered only 11% of industry costs, estimated at ₹20,700 crore.
- **Security:** revenue can fund infrastructure, cybersecurity and fraud prevention.
- **Targeted:** NPCI says about 96% of P2M payments are unaffected and 0.4% is below card charges.
- **Inclusion fund:** 5% of each entity's MDR share supports merchants with turnover up to ₹20 lakh.

## Case against
- Small merchants and street vendors may bear indirect costs.
- Merchants may raise prices despite the non-pass-through rule.
- Legal questions: the petition challenges the Section 10A amendment and NPCI's power; NPCI says it is not 'State' under Article 12.

## Way forward
- Publish data on costs and fee use.
- Review thresholds periodically and keep small merchants exempt.
- Monitor the non-pass-through rule through complaints data.

A narrow, transparent fee can keep UPI sustainable without undoing the inclusion it has achieved.

## The basics

## Why this matters
UPI is India's most widely used digital payment system, and for years it has been free for both payer and merchant. Somebody still pays to run it: banks, app providers and NPCI bear costs, and the government has filled part of the gap from the budget. The Supreme Court case asks whether a small fee on large merchant payments is lawful and fair.

## What the merchant discount rate is
When a customer pays a shop digitally, the shop's bank (the acquirer) takes a small fee from the amount, called the merchant discount rate. The fee is shared among the acquiring bank, the customer's bank, the app provider and the network. On cards, the merchant has always paid it. For UPI and RuPay debit cards, the law set it at zero from 1 January 2020. See Merchant discount rate.

## The legal frame
The Payment and Settlement Systems Act, 2007 lets the RBI authorise payment systems. NPCI was authorised to run UPI in August 2016. Section 10A of the Act was the clause that kept prescribed modes free of charges; the 2026 amendment changed what it covers. Whether NPCI's rules can be tested as violations of fundamental rights depends on whether it is 'State', the question under Article 12 and the meaning of State.

## Who runs UPI
NPCI is a not-for-profit company promoted by the RBI and the Indian Banks' Association under the 2007 Act. It operates UPI, RuPay and other retail systems. NPCI argues that, as a not-for-profit company, it is not 'State', so its rules cannot be challenged through a writ under Article 32.

## Sources

- https://www.livelaw.in/top-stories/merchants-cannot-pass-on-upi-charges-to-customers-mdr-necessary-to-sustain-upi-ecosystem-npci-tells-supreme-court-557510
- https://www.medianama.com/2026/11/223-npci-defends-upi-mdr-charges-supreme-court/
- https://superkalam.com/current-affairs/06-11-2026/merchant-charge-has-been-imposed-to-save-upi-ecosystem-npci-tells-sc-pg16-53ff5314-f165-4ac1-8733-94785e70c631
- https://superkalam.com/current-affairs/15-09-2026/govt-no-bank-charge-on-upi-payment-up-to-rs-2-000-pg1-a37415dd-b896-4d42-85b1-e97fb7c197d3
- https://www.tribuneindia.com/news/business/no-mdr-charges-applicable-on-transactions-via-rupay-upi-from-jan-1-sitharaman-18305
- https://www.npci.org.in/who-we-are/about-us