The National Payments Corporation of India (NPCI) has defended the revised Merchant Discount Rate (MDR) framework for Unified Payments Interface (UPI) transactions before the Supreme Court, arguing that merchants cannot transfer the additional payment-processing charges to customers. In an affidavit filed on November 3, NPCI said the prohibition is a mandatory requirement backed by contractual enforcement mechanisms, and violations could lead to action against banks, payment service providers and UPI application providers.
The submission comes after the Supreme Court soughtDemocrats gearing up to probe JPMorgan’s relationship with Epstein, CNBC reports responses from the Centre, the Reserve Bank of India (RBI) and NPCI on a petition challenging the introduction of MDR on specified UPI merchant transactions above ₹2,000. The revised framework came into effect on October 15, 2026, ending the earlier zero-MDR arrangement for certain higher-value merchant payments. However, the vast majority of everyday UPI transactions remain outside the new charges.
NPCI Tells Supreme Court Merchants Cannot Charge Customers MDR
In its response affidavit, NPCI argued that merchants are not permitted to add MDR charges to customers’ bills or impose separate platform fees for making UPI payments.
The corporation said the prohibition is not merely a policy assurance. It is a mandatory direction supported by contractual arrangements involving banks, payment system providers and third-party application providers.
If the rules are violated, NPCI said it can take compliance action against the entities involved. Possible consequences include termination of their UPI membership and payment facilities.
The submission directly addresses concerns that merchants could indirectly transfer the cost of payment processing to consumers by increasing product prices or adding separate charges.
NPCI argued that the limited scope of the new MDR framework makes widespread price increases unlikely because the charge applies only to a small proportion of merchant transactions.
Importantly, the Supreme Court has not yet delivered a final ruling on the legal challenge. NPCI’s affidavit represents its position in the case, not a final judicial determination.
What Is the New UPI MDR Framework?
Merchant Discount Rate is a payment-processing charge associated with electronic transactions. It is generally paid by merchants to the banks and payment service providers involved in processing payments.
Under the revised UPI framework, a merchant discount rate of up to 0.4% applies to specified person-to-merchant (P2M) transactions exceeding ₹2,000.
The structure varies depending on the type of merchant and transaction.
| Transaction category | MDR treatment |
|---|---|
| P2M transactions up to ₹2,000 | Zero MDR |
| Eligible P2M transactions above ₹2,000 | Up to 0.4% |
| Small merchants under zero-MDR framework | Exempt |
| P2P transfers | Zero MDR |
| Railways, telecom, insurance, fuel and agricultural inputs | Flat ₹5 above ₹2,000 |
| Mutual funds, securities and stockbroker transactions | 0.02%, subject to ₹300 cap |
| Other eligible high-value merchant payments | Maximum ₹300 for transactions of ₹75,000 and above |
The framework also maintains zero MDR for person-to-person transfers, regardless of transaction value.
The distinction between P2P and P2M is important. P2P payments involve transfers between individuals, while P2M payments involve customers paying businesses or merchants.
For example, transferring ₹10,000 to a family member remains outside the MDR framework. A qualifying payment of ₹10,000 to a merchant may attract MDR, depending on the merchant category and applicable exemptions.
Around 96% of UPI Merchant Transactions Remain Unaffected
NPCI told the Supreme Court that approximately 96% of person-to-merchant UPI transactions are valued at ₹2,000 or below.
These transactions remain outside the new MDR framework.
The corporation also said that approximately 70% of UPI transactions are person-to-person transfers, which continue to attract zero charges.
According to NPCI, the new pricing structure therefore affects only a relatively small section of the overall UPI ecosystem.
The corporation argued that the 0.4% ceiling is also considerably lower than the merchant charges associated with other electronic payment systems, including credit and debit cards.
The government and NPCI have maintained that the framework is designed to generate revenue from selected higher-value merchant transactions without changing the free nature of everyday UPI payments.
Why NPCI Introduced MDR After Years of Free UPI Payments
UPI has operated under a zero-MDR framework for merchant transactions since January 2020.
This helped accelerate adoption by removing payment-processing charges for merchants and encouraging businesses to accept digital payments.
However, NPCI has argued that the zero-MDR model created a structural gap between the cost of operating the payment network and the revenue available to support it.
UPI processes billions of transactions every month. Maintaining the infrastructure requires continuous investment in:
- Payment processing systems and technology.
- Cybersecurity and fraud prevention.
- Banking and settlement infrastructure.
- Customer support and dispute resolution.
- Merchant onboarding and payment acceptance.
- System upgrades and operational reliability.
NPCI said the revised MDR framework is intended to support the long-term sustainability of the payments ecosystem.
The charges collected are distributed among participating banks, payment service providers and other eligible entities involved in processing transactions. They are not a government tax or a direct payment to the government’s Consolidated Fund.
The framework also includes a dedicated fund to encourage UPI adoption among smaller merchants with annual turnover of up to ₹20 lakh.
Supreme Court Challenge to the Revised MDR Framework
The revised MDR structure is facing a legal challenge filed by advocate Anjan Datta.
The petition questions the government’s decision to introduce charges on selected UPI transactions and challenges the relevant amendment to Section 10A of the Payment and Settlement Systems Act, 2007.
It also questions the legal basis and classification used to determine which electronic payment transactions remain free and which can attract charges.
On September 28, 2026, the Supreme Court issued notices to the Centre, RBI and NPCI, asking them to respond to the petition.
The court declined to grant an interim stay on the revised framework. This allowed the October 15 implementation to proceed while the legal challenge remained pending.
NPCI filed its response affidavit on November 3, defending the framework and explaining why it believes merchants cannot pass the charges on to customers.
The court will need to consider the arguments and applicable legal provisions before reaching a final decision.
What the MDR Rules Mean for Small Businesses
The new framework is particularly relevant for businesses that rely heavily on digital payments.
Large retailers, restaurants, service providers and online merchants may process a significant number of high-value UPI transactions. Depending on their classification, some of these payments could attract MDR.
Small merchants covered by the zero-MDR framework remain exempt. NPCI has also highlighted the proposed support fund for merchants with annual turnover of up to ₹20 lakh.
For businesses that do attract the charge, the additional expense could affect payment-processing costs and operating margins.
However, merchants are not permitted to separately recover MDR from customers under the framework.
This distinction is important for consumers. A customer paying ₹5,000 through an eligible UPI transaction should not be charged an additional MDR fee on top of the purchase price.
If a merchant imposes a separate UPI surcharge, it would raise a compliance issue under the stated framework.
The Bigger Picture
The dispute highlights a major policy question surrounding India’s digital payments ecosystem: how to maintain free and accessible digital payments while ensuring that the infrastructure supporting them remains financially sustainable.
Zero MDR helped UPI become widely accepted across businesses of different sizes. However, operating a nationwide payments network requires investment in technology, security, settlement systems and customer services.
The revised framework attempts to introduce charges on selected high-value merchant transactions while protecting ordinary payments and small businesses. The Supreme Court challenge will determine whether the legal basis and implementation of the framework withstand judicial scrutiny.
Looking Ahead
The next important development will be the Supreme Court’s consideration of the responses filed by the Centre, RBI and NPCI. Until the court issues a different direction, the revised MDR framework remains operational, and eligible merchant transactions above ₹2,000 can attract the prescribed charges.
For consumers, the central protection is that merchants cannot separately pass MDR on to them. For businesses and payment companies, the focus will be on understanding the applicable merchant categories, complying with the pricing rules and maintaining a sustainable digital payments infrastructure.
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