India’s Supreme Court has permitted the implementation of the government’s new Merchant Discount Rate on certain UPI transactions while requesting the Centre to clarify the legal basis of the policy, leaving the rollout on track amid legal questions.
India’s Supreme Court has allowed the government’s new merchant charge on selected UPI payments to move ahead for now, while pressing the Centre to explain the legal foundation of the policy in an affidavit.
A bench led by Chief Justice Surya Kant, with Justices Joymalya Bagchi and V. Mohana, declined to grant an interim stay in a public interest case filed by advocate Anjan Datta. The petition challenges September notifications that introduced a Merchant Discount Rate, or MDR, on some UPI merchant transactions above Rs 2,000. The new framework is due to take effect on October 15.
The court’s focus was not only on the size of the charge but also on what it is in law. According to the Centre’s submission, the MDR is neither a tax nor a fee, and the government will not receive any share of the proceeds. Additional Solicitor General N. Venkataraman said the charge sits within the payments ecosystem and is meant to be shared among banks, payment service providers and other entities involved in processing digital transactions. The bench asked the government to put that explanation on affidavit.
Under the new arrangement, peer-to-peer UPI transfers remain free, regardless of value. Payments to merchants below Rs 2,000 are also excluded. The Finance Ministry has said about 96% of merchant transactions will be unaffected. Small merchants receiving up to Rs 1 lakh a month through UPI QR codes under the P2PM category will also continue to enjoy zero MDR. For eligible person-to-merchant transactions above Rs 2,000, the general MDR has been set at 0.4%, capped at Rs 300 for transactions of Rs 75,000 and above. Essential sectors such as railways, telecoms, insurance, fuel and agricultural inputs will face a flat Rs 5 charge, while certain capital-market transactions will attract a lower rate of 0.02%, subject to a ceiling.
The government says the changes are meant to support the long-term health of the UPI system, arguing that banks and payment intermediaries bear costs in maintaining the digital payments infrastructure. It has also said consumers should not be charged directly, instructing banks not to pass the burden on to customers and barring UPI apps from adding platform fees or hidden charges on individual users. The court did not rule on that policy rationale, but by refusing to halt the rollout and seeking a fuller explanation of the charge’s legal character, it has left the October 15 implementation on track while keeping the underlying legal question open.
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