Defending its decision to levy charges for transactions above ₹2,000 from individuals to merchants under the revised Merchant Discount Rate (MDR) framework for Unified Payment Interface (UPI), the National Payments Corporation of India (NPCI) has told the Supreme Court that merchants are barred from passing on MDR charges to customers. It has further stated that UPI application providers cannot impose platform fees or other charges for UPI payments.

“Second, non-compliance by a Payer PSP or TPAP with the NPCI Circular's directive against passing on MDR to customers constitutes a breach of the binding obligation under the SLAs to abide by all circulars, orders, directions and instructions issued by the Answering Respondent, and exposes such Payer PSP or TPAP to compliance actions which may also lead to termination of its UPI membership and facilities. Therefore, the non-pass-through directive to the banks and UPI service providers is a mandatory and binding direction, which is enforceable through contractual mechanism in place, and is not a mere 'assurance' or a matter of policy. Thus, apprehension that the consumers are left exposed to an indirect burden is accordingly without any foundation”, the affidavit states.

NPCI has filed a counter affidavit filed on November 3 in a petition challenging the amendment to Section 10A of the Payment and Settlement Systems Act, 2007, introduced through the Taxation and Other Laws (Amendment) Act, 2026, the subsequent Ministry of Finance notification and the revised MDR framework announced in September.

The Supreme Court had in September 2026 sought an affidavit explaining the basis for the move to levy charges for transactions through Unified Payment Interface (UPI) above ₹2,000 from individuals to merchants.

NPCI has submitted that around 96% of person-to-merchant transactions will remain unaffected by the revised MDR, the NPCI has refuted the apprehension that the MDR charges would cause merchants to increase prices.

“The charge under the MDR is attracted only to a small fraction i.e. approximately 4%, of P2M transactions that exceed INR 2,000 and thus, a measure confined so narrowly in its incidence affords less scope for merchants to recalibrate their pricing across their entire customer base merely on account of a charge that arises only occasionally and only above a defined value. Accordingly, the apprehension that the MDR Framework will result in quiet revision of prices is also misconceived”, the NPCI has stated.

NPCI has stated that person-to-person transactions and transactions involving small merchants under the P2PM category will continue to remain free. The P2PM category covers merchants receiving monthly inward UPI credits of up to Rs 1 lakh.

NPCI has submitted that approximately 70% of UPI transactions are person-to-person transfers, while around 96% of person-to-merchant transactions are valued up to Rs 2,000. Both categories will continue to remain free of MDR under the revised framework.

“MDR not exceeding 0.4% will apply to P2M transactions above INR 2000 which means effectively, the said MDR will apply to only about 4% of merchant transactions, and approximately 96% of all P2M will remain unaffected, being either below the INR 2,000 threshold or covered by the zero-MDR framework for small merchants. This narrow incidence of the charge, confined to a small fraction of high-value merchant transactions, demonstrates that the MDR Framework is calibrated to raise revenue for the sustainability of the ecosystem precisely from the class of transactions best placed to bear it without disturbing the free character of the vast majority of UPI usage. Pertinently, the 0.4% ceiling for MDR is far lower than the charges imposed by other system providers for credit cards and debit cards”, the affidavit reads.

The affidavit further states that a dedicated fund is proposed to promote UPI adoption among small merchants with annual turnover of up to Rs 20 lakh, funded by 5% of each entity's MDR share, excluding specified industry-program categories.

“the very class of small merchants and street vendors whom the Petitioner fears will bear this indirect burden as an increased operational cost, is the class the MDR Framework, consistent with its overall intent of ensuring the long-term sustainability of the UPI ecosystem, goes out of its way to shield…A framework that excludes small merchants from the charge altogether, and that further commits a share of the very revenue it generates to their continued digital inclusion, cannot be said to be working towards the digital exclusion of that same class”, the NPCI has stated.

Although the circular initially envisaged implementation from October 15, NPCI has stated that implementation of the framework has since been postponed.

NPCI has argued that MDR is a commercial charge distributed among participants of the UPI ecosystem and is neither a tax nor a fee collected by the Government. It has also defended its statutory authority to prescribe payment-system charges under Sections 20 and 21 of the Payment and Settlement Systems Act.

NPCI Not 'State' Under Article 12: Counter

NPCI has raised a preliminary objection to the maintainability of the petition, submitting that it is not State or State authority under Article 12 and its actions are thus not amenable to the Supreme Court's writ jurisdiction under Article 32.

The affidavit states that the petitioner has failed to establish how the petition or the reliefs sought could be maintained against NPCI, since the constitutional rights invoked under Articles 14 and 19(1)(g) are enforceable only against entities falling within the definition of State under Article 12.

NPCI Is Empowered To Determine Charges Under Payment Systems Act: Counter

NPCI has stated that RBI authorised it in August 2016 to operate UPI as a payment-system provider under Section 4 of the Payment and Settlement Systems Act. NPCI has argued that is empowered under Sections 20 and 21 of the Act to determine and disclose the terms and conditions governing the payment system, including applicable charges.

According to the counter affidavit, the amendment to Section 10A does not itself impose MDR or confer power to levy or fix the rate. Instead, it specifies the electronic payment modes entitled to statutory protection against charges, leaving the determination of charges for other payment modes to authorised payment-system operators under the statutory framework.

The Central Government, through its September 14 notification, specified RuPay debit card transactions without any monetary ceiling and UPI transactions up to Rs 2,000 as modes attracting the no-charge protection under Section 10A.

Following the amendment and notification, NPCI issued a circular on September 15, 2026, introducing the revised MDR framework for UPI Person-to-Merchant (P2M) transactions exceeding Rs 2,000.

MDR Framework Necessary For Sustainability Of UPI: Counter

NPCI has contended that the framework is necessary to ensure the long-term sustainability of the UPI ecosystem, facilitate investments in payment infrastructure and strengthen cybersecurity and fraud prevention.

The counter affidavit states that UPI processes billions of transactions every month and the revised MDR is intended to support investments in infrastructure resilience, innovation, cybersecurity and customer services.

NPCI has relied on recommendations of the Parliamentary Standing Committee on Finance concerning the rising operational expenditure of UPI and the need for a sustainable funding mechanism. It has contended that the zero-MDR regime created a structural cost gap, constraining investments required for the expansion and security of digital payments.

According to NPCI, the revised framework is designed to protect low-value transactions and small merchants while enabling the payment ecosystem to meet its operational costs.

The affidavit refers to the Parliamentary Standing Committee's Thirty-Second Report on Demands for Grants for 2026-27, which observed that the Rs 2,000 crore budgetary allocation intended to offset the costs of the zero-MDR regime covered only 11% of the industry's actual costs and 14% of potential MDR collections.

The Committee had recommended that the Department of Financial Services explore a self-reliant, tiered revenue model to ensure the long-term financial sustainability of the payment ecosystem.

NPCI has further referred to the Ministry of Finance's response to the Committee, which estimated the industry's operational costs at Rs 20,700 crore against the Rs 2,000 crore budgetary allocation for 2026-27.

Revised MDR Framework Does Not Violate Merchants' Fundamental Rights: Counter

NPCI has rejected the challenge to the framework under Articles 14 and 19(1)(g), arguing that the classification based on transaction value, merchant category and merchant size is founded on an intelligible differentia and bears a rational nexus to the objective of ensuring the sustainability, security and inclusivity of the UPI ecosystem.

It has contended that the framework is neither manifestly arbitrary nor an unreasonable restriction on the right to carry on trade or business.

NPCI has highlighted limited incidence of the charge, submitting that most UPI transactions remain unaffected by the framework. It has contended that the framework is a commercially prudent mechanism for ensuring long-term sustainability of UPI while protecting the interests of consumers, small merchants and other stakeholders.