Merchant charge has been imposed to save UPI ecosystem, NPCI tells SC

Why in the News

Unified Payments Interface (UPI) payments to merchants have moved from a zero Merchant Discount Rate (MDR) on every transaction to a charge of up to 0.4% on person-to-merchant (P2M) payments above Rs 2,000. Answering a legal challenge in the Supreme Court, the National Payments Corporation of India (NPCI), which operates UPI, has said zero MDR is no longer sustainable. The cost of running the expanding system would otherwise keep falling on the public exchequer.

What is the MDR, and why is zero MDR ending?

1. What it is: The MDR is a fee a merchant pays to accept a digital payment, covering the system’s running costs. It works like a small toll on each payment.
2. Why it was zero: Zero MDR kept UPI free for everyone, which helped drive its mass adoption across low-value everyday payments.
3. Who paid instead: Since 2021-22 the government covered the costs of zero MDR through incentive schemes. NPCI says this placed a huge financial strain on the public exchequer.
4. Growing system demands: NPCI says UPI’s rapid growth puts greater demands on the system’s security, resilience and infrastructure capacity. Eg. August 2026 saw its highest-ever monthly volume.
5. The takeaway: A payment system built on being free now needs a charge on larger merchant payments to pay for its own running costs.

Who pays the charge, and who stays exempt?

1. Person-to-person payments: Payments between individuals, about 70% of UPI transaction value, stay free whatever the amount. No transaction or platform fee is permitted for individuals sending or receiving money.
2. Small merchant payments: P2M payments up to Rs 2,000 stay entirely free of MDR. This shields the everyday low-value payments of ordinary consumers and small merchants.
3. Narrow reach: The charge applies to only about 4% of merchant transactions, so about 96% of P2M payments are unaffected.
4. Targeted design: The amended framework charges only higher value commerce. It leaves untouched the low-value payments that drive UPI’s adoption.

Is the MDR a tax that needs a law?

1. Petitioners’ case: The petitioners argue that a charge like this needs new legislation passed by Parliament, not merely a notification issued in September.
2. Cost recovery: NPCI argues the MDR is not a tax, cess, fee, duty or statutory levy. The money is shared entirely among the banks and apps that run UPI.
3. No delegated power: NPCI says it sets the charge without any law-making or taxing power from Parliament, the Central Government or the Reserve Bank of India (RBI).
4. System provider’s discretion: NPCI claims that, as the operator of UPI, it is free to fix the MDR on payments that pass through its system.
5. Industry endorsement: The UPI Steering Committee endorsed the MDR framework. Its members include third party application providers, the payment apps people use to send money.

Challenges

1. Contested legal basis: If the Court treats the MDR as a levy, a notification may not be enough to impose it.
2. New cost for larger merchants: Merchants receiving payments above the threshold now bear a charge they did not bear under zero MDR.
3. Unsettled pricing power: The Court must still decide whether NPCI, the Centre or RBI has the power to set the charge.
4. Narrow paying base: Only a small slice of merchant payments carries the charge. The free share of UPI, which the charge does not touch, keeps growing.

Way Forward

1. Clear pricing authority: The Centre and RBI should state in a formal framework who may fix the MDR and on what basis.
2. Published cost basis: NPCI should publish the costs the MDR recovers and how they are shared among participants.
3. Periodic review: The UPI Steering Committee should review the free threshold and the charge cap as volumes grow.

Conclusion

UPI’s free model has run into the cost of operating a payment system at national scale, and NPCI’s answer is a charge on a narrow band of merchant payments. Whether the Supreme Court sees that charge as cost recovery or as a levy needing a law will decide who can price India’s main retail payment system.

Key numbers

1. August 2026 volume: 24.51 billion UPI transactions worth about Rs 29.82 lakh crore (NPCI).
2. Daily average: About 791 million transactions a day in August 2026 (NPCI).
3. 2025-26 total: About 241.62 billion transactions worth about Rs 314 lakh crore (NPCI).

Matching Previous Year Question

“[2026] Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is NOT correct? (a) UPI is a real-time payment system but Digital Rupee is akin to sovereign paper currency (b) In case of UPI, settlement for end users happens instantly; in case of Digital Rupee, wallet balance gets transferred to another wallet (no traditional settlement) (c) UPI transactions are recorded by banks and reflected in bank statements; in case of Digital Rupee, no data is captured in bank statements (d) In both the cases (UPI and Digital Rupee), the liability lies with the users and their respective banks ANSWER: D”