INTRODUCTION
The Supreme Court on Monday, September 28, 2026, declined to grant an interim stay on the Centre’s decision to introduce a 0.4 per cent Merchant Discount Rate (MDR) on specified UPI person-to-merchant transactions above ₹2,000. The charges are scheduled to take effect from October 15, but the Court has agreed to examine the legal challenge and has sought detailed replies from the Union Government, the Reserve Bank of India (RBI), and the National Payments Corporation of India (NPCI) within four weeks.
A Bench headed by Chief Justice Surya Kant, and comprising Justices Joymalya Bagchi and V. Mohana, issued notices while hearing a public interest litigation filed by advocate Anjan Datta. The petitioner has challenged the MDR framework on the ground that it was introduced without adequate statutory safeguards, transparency, or public consultation.
BACKGROUND
UPI has been free for merchants since January 2020, when the Central Board of Direct Taxes removed MDR on person-to-merchant (P2M) transactions through a Gazette notification dated December 30, 2019. The Finance Ministry has said UPI transaction value grew from Rs 21.3 lakh crore in 2019-20 to Rs 260.56 lakh crore by March 2025.
The disputed framework applies a 0.4 per-cent (%) MDR to specified person-to-merchant UPI transactions exceeding ₹2,000. For transactions of ₹75,000 and above, the charge is capped at ₹300. Importantly, UPI payments to merchants up to ₹2,000 and person-to-person transfers will continue to remain free.
The petition, filed as a public interest litigation, challenges a Gazette Notification of September 14, 2026, issued under Section 10A of the Payment and Settlement Systems Act, 2007, and the framework announced on September 15. It also questions the constitutional validity of the amended Section 10A. The petitioner’s core objection is that the Centre’s decision affects a widely used public digital-payment infrastructure and should have followed a more transparent consultative process. The plea also questions whether the charge has a sufficient legal foundation and whether it is arbitrary in its design and application.
KEY POINTS
- The Court issued notice but declined to suspend the framework, even after the petitioner’s counsel asked for a stay until the responses are filed.
- The new framework remains scheduled to come into force on October 15.
- The Bench comprised Chief Justice Surya Kant and Justices Joymalya Bagchi and V. Mohana.
- The Union government, RBI, NPCI and the UPI & Services Steering Committee must file counter-affidavits within four weeks, after which the matter will be heard.
- Additional Solicitor General N. Venkataraman told the Court that the charges start on October 15 and that about 96 per cent of transactions will not be affected. Person-to-person transfers stay free.
- The plea says the levy may squeeze merchants’ working capital, push traders to split payments or refuse UPI, and raise prices for consumers. It also points to the abrupt difference between Rs 2,000 and Rs 2,001.
- The petitioner questions the role of the UPI & Services Steering Committee, arguing that rates and classifications cannot be delegated without clear legislative policy, public disclosure and regulatory oversight.
- The Court asked whether the MDR is a fee or a tax and who will earn from it. It wants the Centre’s answer on the legal basis in an affidavit requiring the authorities’ explanation before final adjudication
RECENT DEVELOPMENTS
Finance Minister Nirmala Sitharaman has said the MDR is a service charge levied by the NPCI, banks, aggregators and POS providers, and that the money is “not coming to the Government of India and we are not imposing it.” The RBI has called MDR on large-value transactions a step towards long-term sustainability, adding that UPI stays free for users. The framework bars merchants from passing the charge to customers, though the petitioner argues the cost may still reach them. Trade bodies plan a ‘No UPI Day’ on October 2. Merchants plan to symbolically cover their UPI QR codes and soundboxes with black cloth and refuse UPI payments for the day.
CONCLUSION
The Court’s approach is measured. By refusing an interim stay, it has avoided halting a policy that the government says affects a small share of transactions. The decision balances administrative continuity with judicial review: the rollout may proceed, but the government must now place on record the legal and policy justification for charging merchants on higher-value UPI transactions.
The case will be closely watched because it concerns not merely a payment charge, but the transparency and legal accountability surrounding India’s digital public infrastructure. The four-week window ends after the October 15 start date, so the levy may begin before the case is heard. Much will depend on what the Centre, RBI and NPCI place on record.
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WRITTEN BY: HARSHMEET KAUR SUDAN
