🗞️ Why in News The Supreme Court on 28 September 2026 refused to stay the merchant discount rate (MDR) of 0.4 per cent on person-to-merchant (P2M) UPI payments above Rs 2,000, due to start on 15 October 2026. A Bench of Chief Justice Surya Kant and Justices Joymalya Bagchi and V. Mohana issued notice to the Union Government, the Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI) on a public interest petition by advocate Anjan Datta, which also challenges the amended Section 10A of the Payment and Settlement Systems Act, 2007. Counter-affidavits are due in four weeks.
What Was Said in Court
The hearing turned on a single question from the Bench. “If it is not a tax or fee, what is the executive scope of making this expropriation? We want an explanation in an affidavit... If not a fee, what is its character?” Justice Bagchi asked Additional Solicitor General N. Venkataraman, according to The Hindu.
The government’s answer, in court and outside it:
- The charge will touch “a scarce, thin” population: about 96 per cent of users are exempt, essential services pay a flat Rs 5, and the fee is capped at Rs 300 per transaction.
- It is levied within the merchant payment ecosystem, by banks and payment aggregators, and “the government does not take anything”; it is “a purely administrative mechanism”.
- Finance Minister Nirmala Sitharaman had said days earlier that the MDR is not a tax, cess or surcharge.
The petition argues that charges on UPI will push small payments back to cash, and that the amended Section 10A gives the executive unguided power to decide which payment modes stay free. It points out that RuPay debit cards keep the no-charge protection without any ceiling, while UPI’s protection stops at Rs 2,000.
The Framework from 15 October
For context, the rates were set out by NPCI on 15 September 2026; the government has “advised” banks to ensure merchants do not pass the charge on to customers.
| Payment | Charge |
|---|---|
| Person-to-person (P2P) transfers, any amount | Free |
| P2M up to Rs 2,000 | Free (statutory protection) |
| P2M above Rs 2,000 | 0.4 per cent, capped at Rs 300 (the cap bites from Rs 75,000) |
| Essential services (railways, telecom, insurance, fuel, agricultural inputs) above Rs 2,000 | Flat Rs 5 per transaction |
| Securities markets and mutual funds | 0.02 per cent, capped at Rs 300 |
| Small merchants receiving up to Rs 1 lakh a month | Exempt |
| Utility bills, subscriptions and recurring (autopay) payments | No MDR, as reported |
| RuPay debit cards | Free, with no value limit |
The customer pays nothing. The MDR is deducted from what the merchant receives.
How the Law Changed: From Zero MDR to a Notified List
| Date | Step |
|---|---|
| 2019 | The Finance (No. 2) Act, 2019 inserted Section 269SU in the Income-tax Act, 1961 (businesses with turnover above Rs 50 crore must offer prescribed electronic payment modes) and Section 10A in the Payment and Settlement Systems Act, 2007 (no bank or system provider may charge the payer or the payee for those modes) |
| 1 January 2020 | Zero MDR took effect for RuPay debit cards and UPI, the modes prescribed under Section 269SU |
| 2021-22 onward | The Centre paid banks an incentive for RuPay debit and low-value BHIM-UPI P2M transactions to compensate for the missing fee |
| 1 April 2026 | The Income-tax Act, 2025 replaced the 1961 Act |
| 10 August 2026 | Parliament passed the Taxation and Other Laws (Amendment) Bill, 2026, which delinked Section 10A from the Income-tax Act: the protection now covers only modes notified by the Central Government (assent reported on 17 August) |
| 14 September 2026 | Finance Ministry notification S.O. 5067(E) notified RuPay debit cards and UPI transactions up to Rs 2,000 as the no-charge modes |
| 15 September 2026 | NPCI circular set the MDR rates, effective 15 October 2026 |
| 28 September 2026 | Supreme Court declined an interim stay and sought replies |
Note the gap the Bench spotted. In the background, the notification of 14 September only lists what stays free. The 0.4 per cent rate itself appears in the NPCI circular and official explanations, not in the Gazette. That is why the Court asked what legal character the charge has and where the power to fix it comes from.
The Constitutional Questions
| Question | The legal hinge |
|---|---|
| Is it a tax? | Article 265: no tax shall be levied or collected except by authority of law. A tax is a compulsory exaction for public purposes, with no direct return to the payer |
| Is it a fee? | A fee needs a broad quid pro quo, a service rendered to the payer, as held in the Shirur Mutt case (1954). The government says the MDR is neither: it is a commercial charge for a payment service, retained by banks and aggregators |
| Excessive delegation | Parliament must lay down the policy and guidelines; it cannot hand the executive unguided power (In re Delhi Laws Act, 1951). The petition says the amended Section 10A lets the executive choose, without criteria, which modes stay free |
| Equality | Article 14: RuPay debit cards are free without limit, UPI only up to Rs 2,000. The State must show an intelligible differentia with a rational link to the object |
| Freedom of trade | Article 19(1)(g): merchants may argue that a charge fixed outside law burdens their trade; the State will cite the reasonable restriction in Article 19(6) |
What MDR Is, and Who Is Involved
Merchant discount rate is the fee a merchant pays, as a share of the transaction, for accepting a digital payment. It is shared among the parties that make the payment work: the merchant’s bank (acquirer), the customer’s bank (issuer), the payment apps and aggregators, and the network.
| Body | Role |
|---|---|
| NPCI | Umbrella body for retail payments, set up in 2008 by the RBI and the Indian Banks’ Association as a not-for-profit company; runs UPI (launched 2016), RuPay, IMPS and other systems |
| RBI | Regulates and supervises payment systems under the Payment and Settlement Systems Act, 2007; NPCI operates under its authorisation |
| Central Government | Now decides, by notification under Section 10A, which modes carry the no-charge protection |
Analysis
1. Free was never costless. Zero MDR made UPI the default way Indians pay, but someone paid for the servers, fraud checks and customer support. Since 2021-22 that someone was the taxpayer, through incentive payments to banks. The 2026 framework moves part of the cost to large merchant transactions.
2. The design protects small users, on paper. P2P transfers, small-ticket P2M payments, small merchants and essential services are shielded, which is why the government argues the burden is narrow. The test will be whether merchants quietly raise prices or refuse UPI for large bills.
3. The law’s form is the weak point. Parliament gave the executive power to list what stays free. The rate itself came from a network circular. Where a charge applies across the country, courts expect it to rest on a clear statute or a published rule. The Bench’s questions about legal incidence go to that gap.
4. The cash question is real but measurable. The petitioner fears a return to cash and unaccounted transactions. The data to watch after 15 October: the share of P2M payments just below Rs 2,000 (a sign of bill-splitting), card versus UPI shares, and cash in circulation.
5. Competition and the RuPay carve-out. Keeping RuPay debit cards free without limit favours a domestic card network over UPI above Rs 2,000. The State will have to justify the difference under Article 14.
UPSC Relevance
GS Paper 3. Indian economy: mobilisation of resources, the banking and payments system, digital public infrastructure, government budgeting (subsidies). GS Paper 2. Separation of powers, delegated legislation, and judicial review; statutory and regulatory bodies (RBI, NPCI).
A question worth preparing. “Zero merchant discount rate built UPI’s scale, but it was never costless.” Examine the case for and against charging merchants on digital payments, and the legal questions such a charge raises. (250 words)
The Mains framing. Explain MDR and why zero MDR made UPI dominant. Set out the cost to banks and the budget. Describe the 2026 framework and its exemptions. Then the legal questions: Article 265, the tax and fee distinction, excessive delegation and Article 14. Conclude with a way forward: a transparent, statute-backed pricing rule, published in the Gazette, periodic review by the RBI, targeted protection for small merchants and data on cash substitution.
📌 Facts Corner, Knowledgepedia
Prelims, statement-ready facts:
- Section 10A, Payment and Settlement Systems Act, 2007: no charge on notified electronic payment modes; inserted 2019, amended 2026.
- Zero MDR on UPI and RuPay debit cards began 1 January 2020.
- Notification S.O. 5067(E), 14 September 2026: free modes are RuPay debit cards and UPI up to Rs 2,000.
- MDR from 15 October 2026: 0.4 per cent on P2M above Rs 2,000, capped at Rs 300; essential services flat Rs 5.
- Small merchants receiving up to Rs 1 lakh a month are exempt; P2P transfers are always free.
- NPCI: set up 2008 by the RBI and IBA, a not-for-profit company; UPI launched 2016.
- Bench: CJI Surya Kant, Justices Joymalya Bagchi and V. Mohana; notice issued, no stay (28 September 2026).
Prelims, the traps:
- The MDR is paid by the merchant, not the customer.
- The RBI regulates payment systems under the 2007 Act; NPCI operates UPI; the Central Government notifies the free modes.
- The Rs 300 cap applies from Rs 75,000; the free limit is Rs 2,000.
Mains, arguments and keywords:
- Sustainability of digital public infrastructure; cost recovery versus inclusion; delegated legislation and Article 265.
- Keywords: quid pro quo, legal incidence, excessive delegation, intelligible differentia, cash substitution.
Interview, be ready for:
- “Should UPI stay free forever?” Keep it free for P2P and small payments as public infrastructure; recover costs from large merchants through a rule Parliament has clearly authorised and the public can read.
Sources: The Hindu, The Indian Express, PRS Legislative Research, Taxation and Other Laws (Amendment) Bill, 2026, SCC Online, NPCI FAQs on UPI MDR
Source: UPI Merchant Discount Rate: Supreme Court Declines a Stay and Asks What the Charge Is — Ujiyari.com | Free UPSC & State PCS Current Affairs
