In a significant development for India’s digital payments landscape, the Supreme Court on Monday (28 September 2026) declined to grant an interim stay on the 0.4% merchant discount rate (MDR) on specified UPI person-to-merchant (P2M) transactions above ₹2,000. The levy, which comes into force on 15 October 2026, will now proceed as scheduled — even as the court demanded answers from the government on the legal basis for the charge.
A bench led by CJI Surya Kant, alongside Justices Joymalya Bagchi and V. Mohana, issued notices to the Centre, the Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI), directing them to file counter-affidavits within four weeks. The directions came on a public interest writ petition filed by advocate Anjan Datta, challenging the new UPI MDR framework (The Tribune, Business Standard, Gujarat Samachar, Free Press Journal, Verdictum, India.com).
What the Supreme Court decided
Refusing to stall the 15 October rollout, the Supreme Court sought responses from the Centre, the RBI and the NPCI on the legality of the 0.4% charge. The PIL, filed by advocate Anjan Datta, questions the Finance Ministry’s 14 September 2026 Gazette notification issued under Section 10A of the Payment and Settlement Systems Act, 2007, and the MDR framework announced a day later (LiveLaw, The Tribune).
The bench made it clear it wanted answers on affidavit rather than arguments across the bar — with the CJI observing that the issue was less legal and more technical, and needed the facts on record before anything could be decided (The Tribune). Counter-affidavits are due in four weeks, which means the charge will begin operating before the government files its full defence (Verdictum).
How the 0.4% MDR works: what you and merchants will pay
From 15 October 2026, specified UPI person-to-merchant (P2M) transactions above ₹2,000 will carry an MDR of 0.4%. Importantly, the charge is paid by the merchant, not the customer — but, as the courtroom debate revealed, it can indirectly find its way to consumers (Moneycontrol).
Here is the breakdown that matters for Indian shoppers and shopkeepers:
- Transactions up to ₹2,000: completely free, no MDR (Kotak Neo).
- Transactions above ₹2,000: 0.4% MDR paid by the receiving merchant (Moneycontrol).
- Cap: the charge is capped at ₹300 for transactions of ₹75,000 and above — so even a ₹5 lakh payment will attract no more than ₹300 (Business Standard).
- To illustrate the math on our own: a ₹3,000 UPI payment to a merchant would attract ₹12 in MDR (0.4% of ₹3,000) — a small amount per transaction, but one that adds up for shops processing hundreds of such payments a day. This is our own worked example, not a figure from any court filing.
The charge is collected as a settlement fee between banks and payment aggregators/providers, facilitated by the NPCI — a structure the Centre insisted makes it very different from a tax (The Tribune).
Who stays exempt — small merchants, essentials, P2P
The good news for most Indians: the Centre told the court that 96% are exempt. The exemptions are substantial and deliberately layered:
- Small merchants: shops receiving up to ₹1 lakh a month through UPI QR codes fall in the special “P2PM” category and pay no MDR. A merchant shifts to the regular P2M category — and the 0.4% charge — only after crossing ₹1 lakh for three consecutive months (Business Standard).
- Person-to-person (P2P) transfers: fully free at any amount. These account for 37% of UPI transaction volume and 70% of transaction value, so the vast majority of everyday money movement is untouched (India.com).
- Essential services: payments to railways, telecom, insurance, fuel and agricultural-input providers attract only a flat ₹5 on transactions above ₹2,000 (Business Today).
- Capital markets: mutual fund, securities and broker payments carry a much lower 0.02% MDR, also capped at ₹300 (Free Press Journal).
The courtroom battle: ‘not a tax’ vs ‘unguided executive power’
The sharpest exchanges in court were about what this charge actually is — and whether the government had the power to impose it.
The Centre’s counsel, ASG N. Venkataraman, told the bench the levy is neither a tax nor a fee in the legal sense. The government, he said, takes “not a rupee” — it is purely a settlement fee between banks and payment aggregators/providers, facilitated by the NPCI (The Tribune).
Justice Joymalya Bagchi pressed harder. He wanted to know the executive’s scope for imposing the charge and what service was actually being rendered. If it is a fee, he observed, it would need legislative backing — there could be no such thing as an “executive fee” — and he directed that the explanation come on affidavit (Verdictum). He also asked the pointed question — who gets the payment? — and queried the source of the legal incidence of the charge (ChiniMandi/PTI).
On the petitioner’s side, advocate Anjan Datta raised three constitutional and practical objections:
- Unguided power: the amended Section 10A of the Payment and Settlement Systems Act, 2007 gives the executive unguided powers, and the levy arrived without statutory safeguards, transparency or public consultation (India.com).
- Discrimination: RuPay debit cards continue to enjoy no-charge protection with no monetary ceiling, while UPI’s protection stops at ₹2,000 — a distinction the petitioner calls arbitrary and discriminatory under Article 14 (LiveLaw).
- Pass-through costs: merchants — especially low-margin ones — will either pass the cost on to consumers through higher prices or refuse UPI payments altogether, and the charge could push more transactions into cash and black money (Free Press Journal, Business Standard).
The bench refused the interim stay but kept every one of these questions alive for the next hearing.
Why it matters: the end of free UPI for big payments
To grasp the significance, rewind: UPI has carried zero MDR since January 2020, following a CBDT notification of 30 December 2019. For nearly six years, India’s flagship payments rail has been completely free for merchants and users alike (The Tribune).
That era now ends for larger merchant payments. While the ₹2,000 threshold, the ₹300 cap, the P2PM small-merchant shield and free P2P transfers cushion the blow, the change is philosophically large: India is, for the first time, pricing its digital-payments infrastructure for bigger commercial transactions. How merchants respond — absorbing the cost, passing it on, or steering customers to other rails — will shape everyday commerce from 15 October (Business Standard, Business Standard).
What happens next
The 0.4% MDR takes effect on 15 October 2026 unless a court orders otherwise. The Centre, RBI and NPCI must file counter-affidavits within four weeks, explaining the statutory source of the levy, its character, and where the money flows (Free Press Journal, Verdictum). The Supreme Court has not prejudged the PIL — it has simply let the charge begin while the legal battle plays out. For merchants above the P2PM threshold and for consumers paying over ₹2,000 by UPI, the countdown to India’s first UPI charge has begun.
