The Supreme Court on September 28 refused to grant an interim stay on the Centre’s decision to introduce a Merchant Discount Rate on specified UPI payments above Rs 2,000. The court, however, sought an affidavit from the Union government explaining the legal and technical basis of the proposed framework.
The case concerns the introduction of a 0.4 percent MDR on specified person to merchant UPI transactions exceeding Rs 2,000. The proposed framework is scheduled to come into effect from October 15, 2026. The Supreme Court also issued notices to the Reserve Bank of India and the National Payments Corporation of India in connection with the challenge.
What Is The UPI MDR Issue
Merchant Discount Rate, commonly known as MDR, is a fee associated with processing digital payments. Under the new framework announced by the Centre, a 0.4 percent MDR will apply to specified UPI payments made by customers to merchants when the transaction value exceeds Rs 2,000.
The government has clarified that MDR is not a tax and is not money collected by the government or NPCI. Instead, the amount is distributed among participants in the digital payment ecosystem, including banks and payment service providers.
The Supreme Court challenge has questioned the legal basis of the new framework and the manner in which the charges were introduced. The petitioner has raised questions about the Rs 2,000 threshold and other provisions of the framework.
Supreme Court Seeks Centre’s Affidavit
During Monday’s hearing, the Supreme Court declined to halt implementation of the proposed MDR system at this stage. The bench said that it required relevant facts and directed the Centre to provide the details through an affidavit.
The court’s decision means that the October 15 implementation date remains in place for now, although the legal challenge is continuing. The final position could depend on the government’s response and subsequent proceedings in the case.
The Additional Solicitor General appearing for the Centre told the court that the framework had not yet fully come into operation and that October 15 would be the first implementation milestone. The government also submitted that around 96 percent of payment gateway transactions would remain exempt under the framework.
Who Will Pay The MDR
The proposed 0.4 percent MDR is applicable to specified person to merchant transactions above Rs 2,000. It is important to distinguish this from a direct fee imposed on customers.
According to the government’s framework, customers will not be required to separately pay MDR when making eligible UPI payments. Banks have been advised that merchants should not pass the MDR cost directly to customers. UPI application providers are also not permitted to impose hidden platform charges on users under the framework.
For example, if a customer makes an eligible UPI payment to a merchant for an amount above Rs 2,000, the MDR operates within the merchant payment ecosystem. It is not designed as an additional amount that the customer must enter and pay separately during the UPI transaction.
What UPI Transactions Will Remain Free
The government has specified several categories that will continue without MDR.
Person to person UPI transactions will remain completely free regardless of the amount transferred. This means that sending money to another individual through UPI will not attract the proposed MDR.
Merchant payments of up to Rs 2,000 will also remain free from MDR.
Small merchants receiving up to Rs 1 lakh per month through UPI QR codes under the specified framework will continue to receive zero MDR treatment.
The government has estimated that approximately 96 percent of person to merchant transactions will remain unaffected because they are either below the Rs 2,000 threshold or fall under the zero MDR provisions for eligible small merchants.
Special Charges For Certain Sectors
The framework also provides separate treatment for certain essential and thin margin sectors. Payments above Rs 2,000 in sectors including railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat MDR of Rs 5 per transaction rather than the general 0.4 percent rate.
Capital market transactions also have a separate rate. Payments related to mutual funds, securities, stockbrokers and dealers will attract an MDR of 0.02 percent, subject to a maximum cap of Rs 300 per transaction.
Maximum MDR Cap
For general eligible merchant transactions, the 0.4 percent MDR will be capped at Rs 300 for transactions of Rs 75,000 and above.
This means that the percentage based charge does not continue increasing indefinitely as the transaction value rises. Once the applicable MDR reaches the specified maximum, the charge is limited to the cap under the framework.
Why The Matter Reached The Supreme Court
A public interest litigation was filed challenging the Centre’s decision to introduce the new MDR system. The petition questions the legal basis of the framework and raises concerns about the Rs 2,000 threshold and the classification of different categories of UPI transactions.
The petition also challenges the Centre’s September 14 notification and the MDR framework announced on September 15. The new system is scheduled to begin on October 15.
The petitioner has argued that the framework could affect merchants and digital payment users and has questioned whether adequate statutory safeguards and transparency were followed while introducing the new system.
These are arguments made in the petition and remain subject to consideration by the Supreme Court. The court has not issued a final ruling on the validity of the framework.
Government’s Position
The Centre has defended the proposed MDR framework and has said that the charge is intended to support the digital payment ecosystem rather than generate revenue for the government.
The government has also maintained that the MDR is not a tax or a government charge. According to the official explanation, the amount is distributed among payment ecosystem participants that provide and operate the services required for UPI transactions.
The government has further stated that ordinary users will continue to have free access to UPI for person to person transactions and that most merchant transactions will remain outside the MDR framework.
What Happens From October 15
For now, the proposed October 15 rollout remains scheduled because the Supreme Court has not granted an interim stay.
However, the legal challenge is still pending. The Centre has been directed to submit its affidavit, after which the Supreme Court will consider the matter further.
Therefore, the September 28 order does not amount to a final judicial approval of the MDR framework. It only means that the court has declined to suspend its implementation at the present stage while seeking further information from the government.
Impact On Consumers And Merchants
For ordinary UPI users, the proposed framework does not introduce a general fee on every UPI transaction. Person to person transfers will remain free, and merchant payments up to Rs 2,000 will not attract MDR.
The impact is more directly connected to merchants and payment ecosystem participants involved in specified higher value transactions.
However, merchant associations have raised concerns about the possible effect of MDR on businesses operating with limited margins. The All India Mobile Retailers Association has announced a planned No UPI Day on October 2 to highlight concerns over the proposed charges.
The eventual effect on merchants and consumers will depend on how the framework is implemented and whether the Supreme Court makes any further orders before October 15.
For now, the key points are that the Supreme Court has refused an interim stay, the Centre must submit an affidavit, and the proposed MDR framework remains scheduled for implementation from October 15, 2026.
