NPCI tells Supreme Court zero-MDR UPI is unsustainable, defends 0.4% merchant fee
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.
Published 6 November 2026. Written by Pratidin from the reports linked at the end; every fact checked by a separate review before publishing. How we work
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?
- 1 and 2 only
- 2 and 3 only
- 1 and 3 only
- 1, 2 and 3
Show answer
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.
Use this in UPSC Mains: previous-year questions
Recurring theme: Digital payments, the cost of UPI and financial inclusion
- How to use this
Use the UPI fee design to show how inclusion goals shape payment pricing, with small merchants and person-to-person transfers kept free.
- UPI's MDR of up to 0.4% applies only to merchant payments above ₹2,000; person-to-person transfers, about 70% of UPI transactions, stay free.
- Merchants with monthly UPI credits up to ₹1 lakh stay at zero MDR, and 5% of each entity's MDR share funds a programme for merchants with annual turnover up to ₹20 lakh.
- The petitioner warns that small merchants and street vendors may bear indirect costs, and merchants may raise prices despite the non-pass-through rule.
- How to use this
Use the UPI MDR case to show that market-based digital finance can stay inclusive when pricing is targeted at larger users.
- NPCI says about 96% of merchant UPI payments are unaffected by the new fee.
- A ₹2,000 crore budget allocation covered only 11% of UPI industry costs, showing the limits of state-funded free services.
- A non-pass-through rule bars merchants from charging customers the MDR.
Shows how UPI changed payments; the MDR debate is about who pays to keep that system running.
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.
- 1Payer's bankHolds the customer's account and debits it.
- 2Acquiring bankHolds the merchant's account; collects any MDR.
- 3UPI app providerGives the customer the app interface; cannot levy platform fees under the framework.
- 4NPCIRuns the UPI switch and sets system rules, including MDR.
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.
- Zero MDR left a structural cost gap
- Budget allocation covered 11% of industry costs
- Fee applies to only about 4% of merchant payments
- MDR is a commercial charge, not a tax
- Small merchants and street vendors bear indirect costs
- Merchants may raise prices
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.
- August 2016RBI authorises NPCI to operate UPI.
- 1 January 2020Zero MDR on RuPay debit cards and UPI takes effect.
- 14 September 2026Centre notifies the payment modes that stay free of charges.
- 15 September 2026NPCI issues its revised MDR circular.
- 3 November 2026NPCI files its counter affidavit in the Supreme Court.
Go deeper
Why it matters for UPSC
UPI is a flagship of India's digital public infrastructure. The case touches financial inclusion, the cost of public digital goods, regulation of payment systems and a classic polity question on who counts as 'State'. It is useful for GS3 answers on digital payments and GS2 answers on fundamental rights.
The core idea
The Merchant discount rate is the fee banks charge merchants for digital payments. It was set at zero for UPI from 2020. NPCI, which runs UPI under the Payment and Settlement Systems Act, 2007, now wants a fee of up to 0.4% on merchant payments above ₹2,000. The petitioner says the fee hurts small sellers. NPCI first argues the court cannot test its rules against fundamental rights at all, because of Article 12 and the meaning of State.
Numbers and dates to remember
- 0.4%: MDR ceiling; ₹2,000: threshold for person-to-merchant payments.
- About 70%: share of UPI transactions that are person-to-person.
- About 96%: share of merchant payments NPCI says are unaffected.
- ₹1 lakh: monthly UPI credits below which merchants stay at zero MDR.
- 1 January 2020: zero MDR begins; 3 November 2026: NPCI affidavit filed.
Where to go next
- Merchant discount rate: what the fee is and who shares it.
- NPCI: the body that runs UPI.
- Payment and Settlement Systems Act, 2007: the law behind payment systems.
- Article 12 and the meaning of State: why NPCI says writs cannot reach it.
Go deeper: is free UPI a public good or a subsidy that must end?
The case for zero MDR was adoption. From 1 January 2020, the government told large businesses to offer UPI and RuPay debit cards with no fee; zero-MDR incentive schemes for banks followed in 2021-22. UPI grew fast. The cost, however, did not disappear. NPCI's affidavit says the budget allocation covered only 11% of industry costs, which it puts at ₹20,700 crore, so banks and apps had little reason to invest in security and service. A Merchant discount rate on large merchant payments shifts part of the cost to those best able to bear it.
The case against starts with incidence. Even with a ban on passing the fee on, a merchant can raise prices for everyone. The petitioner also argues that small merchants and street vendors would bear an indirect burden. There is also a governance question: should a fee that affects millions of people be set by a company's circular, or by a regulator with public consultation? NPCI says it acts within powers given under the Payment and Settlement Systems Act, 2007, with the RBI's oversight.
The legal battle has a threshold step. Fundamental rights are enforced against 'State'. If NPCI is not 'State', the challenge under Articles 14 and 19(1)(g) may fail at the door, leaving only the challenge to the law itself. Courts decide this using tests of functional, financial and administrative control by the government, explained in Article 12 and the meaning of State.
Merchant discount rate
What the fee is and who shares it.
In one line: The merchant discount rate (MDR) is the fee a merchant's bank deducts for accepting a digital payment, shared among the players who make the payment work.
How it works
When a customer pays by card or UPI, the merchant does not receive the full amount. The acquiring bank keeps a small percentage, part of which goes to the customer's bank, the network and app providers. On cards this has always existed.
Zero MDR
From 1 January 2020, the government made UPI and RuPay debit card payments free of MDR, and required businesses with turnover above ₹50 crore to offer them. Zero-MDR incentive schemes for banks followed in 2021-22.
Why it is in the news
NPCI's revised framework allows an MDR of up to 0.4% on person-to-merchant payments above ₹2,000, with small merchants exempt. NPCI is defending it in the Supreme Court.
Where to go next
NPCI
The body that runs UPI.
In one line: The National Payments Corporation of India is the umbrella body for retail payments, promoted by the RBI and the Indian Banks' Association.
What it is
NPCI is a not-for-profit company, registered under Section 25 of the Companies Act, 1956, which is now Section 8 of the Companies Act, 2013. It works under the Payment and Settlement Systems Act, 2007. It took over the National Financial Switch for ATMs in December 2009 and later built UPI and RuPay.
What it does
It runs the central switch for UPI and sets the system's rules, including fees and app conduct. It was authorised by the RBI to operate UPI in August 2016.
Why it is in the news
NPCI has defended its 0.4% MDR framework before the Supreme Court and argued that it is not 'State', so writ petitions on fundamental rights cannot be brought against it.
Where to go next
Payment and Settlement Systems Act, 2007
The law behind payment systems.
In one line: The Payment and Settlement Systems Act, 2007 is the law under which the RBI authorises and oversees payment systems in India.
What it does
No one can run a payment system without RBI authorisation under Section 4. NPCI relies on this authorisation and on Sections 20 and 21, which it says allow a system provider to set and disclose charges.
Section 10A
Section 10A dealt with charges on prescribed electronic modes. The Taxation and Other Laws (Amendment) Act, 2026 amended it, and a petition in the Supreme Court challenges that amendment. NPCI says the Section 10A amendment does not itself impose MDR.
Where to go next
Payment and Settlement Systems Act, 2007: every story that connects to it (2)
Article 12 and the meaning of State
Why NPCI says writs cannot reach it.
In one line: Article 12 defines 'the State' for Part III, and fundamental rights can generally be enforced only against bodies that fall within it.
What it covers
Article 12 includes the Government and Parliament of India, State governments and legislatures, and all local or other authorities within India or under the control of the Government of India. Courts have read 'other authorities' to include bodies that are instruments or agencies of the state, judged by tests such as financial, functional and administrative control by the government.
Why it is in the news
NPCI argues it is a not-for-profit company and not 'State', so claims under Articles 14 and 19(1)(g) cannot be enforced against it through Article 32. If the court agrees, the petition will turn on the validity of the law itself.
Where to go next
Take the 6 November 2026 quiz: 30 Prelims-style questions with answers