NEW DELHI: While refusing to put the new framework on hold, the Supreme Court on Monday sought an affidavit from the Union government explaining the legal and technical basis for imposing a merchant discount rate (MDR) on specified unified payments interface (UPI) person-to-merchant transactions above ₹2,000.
A bench comprising chief justice of India (CJI) Surya Kant, justice Joymalya Bagchi and justice V Mohana issued notice to the Union government, Reserve Bank of India (RBI), the National Payments Corporation of India (NPCI) and the UPI and services steering committee on a petition challenging the 14th September and 15 September 2026 notifications introducing the new framework. The MDR regime is scheduled to come into effect from 15 October 2026.
The petition has been filed by advocate Anjan Datta, who has challenged the government’s decision to allow MDR on specified commercial UPI payments above the ₹2,000 threshold.
The hearing turned largely on a basic question from the bench: what is the legal character of the charge and on what authority has it been imposed?
Additional solicitor general (ASG) N Venkataraman, appearing for the Union government, told the Court that the framework would take effect only from 15 October 2026 and that around 96% of merchant transactions would remain unaffected. He also submitted that transactions involving specified essential services would carry a capped MDR of ₹5.
“It is neither a tax nor a fee,” the ASG submitted.
Chief justice Surya Kant said the government should place the relevant facts before the court on affidavit. “We need these facts on affidavit. It’s more of a technical issue,” the CJI observed.
Justice Bagchi pressed the government on the legal basis of the charge. If the levy was neither a tax nor a fee, he asked, what was the executive basis for imposing it and what service was the charge intended to cover?
The government maintained that the amount is not an exaction. The ASG said the Union government would not receive any part of the MDR and described it as a settlement-related charge within the payments ecosystem involving banks and other participating entities.
Defending the framework, the government argued that electronic payment systems involve costs for the entities processing and settling transactions. Debit and credit card transactions, for instance, have traditionally involved processing charges, while UPI payments have largely operated without MDR.
The government’s position is that the new framework is intended to provide a mechanism for meeting those costs while keeping the bulk of UPI transactions free. The government has also maintained that the framework does not introduce a charge on all UPI transactions.
Person-to-person (P2P) transfers will remain free regardless of the amount involved. Person-to-merchant (P2M) transactions up to ₹2,000 will also remain free, while small merchants covered by the zero-MDR provisions will continue to be exempt.
Under the notified framework, the standard MDR for specified P2M UPI transactions above ₹2,000 is 0.4%. For transactions of ₹75,000 or more, the charge is capped at ₹300.
Specified essential and thin-margin sectors, including railways, telecommunications, insurance, fuel, and agricultural inputs, will attract a flat MDR of ₹5 for qualifying transactions. Specified capital-market transactions carry a lower MDR of 0.02%, subject to a ₹300 cap.
Small merchants receiving up to ₹1 lakh a month through UPI QR codes under the relevant P2M category will continue to benefit from zero MDR.
During the hearing, Justice Bagchi also referred to Section 269SU of the Income Tax (I-T) Act, which requires specified businesses above the prescribed turnover threshold to provide facilities for accepting electronic payments.
The judge questioned how the legal incidence of the new charge should be characterised and where the authority for imposing it originated.
The exchange reflects one of the central issues raised by the petition: whether the executive has adequately established the legal basis for creating the new payment burden through the notified framework.
The petitioner has argued that the government has not disclosed the cost studies or methodology underlying key thresholds, including the ₹2,000 transaction limit and the ₹1 lakh monthly receipt ceiling.
The petition also questions the distinction between a transaction of ₹2,000, which remains protected from MDR, and one of ₹2,001, which falls within the charging framework.
Advocate Datta, the petitioner, further argued that the financial burden could ultimately be borne by consumers, even though the government has advised banks to ensure that merchants do not pass MDR on to customers.
According to the plea, merchants operating on thin margins could respond by increasing prices, refusing UPI payments for larger transactions or splitting transactions to stay below the threshold.
The petition also argues that introducing charges on higher-value UPI payments could undermine one of the factors that helped drive the adoption of digital payments and could encourage greater use of cash.
The petitioner sought an interim stay on the implementation of the framework, arguing that the move could have wider consequences for merchants and consumers.
The bench, however, declined to grant a stay at this stage. The court instead sought responses from the Union government and the other respondents, leaving the 15 October 2026 implementation date intact for now.
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