Merchant charge has been imposed to save UPI ecosystem, NPCI tells SC

1. At a Glance

• Merchant Discount Rate (MDR) is the fee a merchant pays to the payment chain for taking a digital payment. The government has decided to bring in an MDR of 0.4% on Person-to-Merchant (P2M) UPI transactions, and that decision has been challenged in the Supreme Court [1].
• NPCI told the SC that a "zero MDR" for all UPI transactions is no longer sustainable. Without a fee, the running costs of a fast-growing system would fall on the public exchequer [1].
• NPCI says the fee will apply to only about 4% of merchant transactions [1].
• Why it matters for UPSC: it covers digital public infrastructure (DPI), financial inclusion versus financial sustainability, fiscal cost of subsidies, and how courts review economic policy.

2. Why in the News

• NPCI filed an affidavit in the Supreme Court defending the merchant charge. The Hindu reported it on 6 November 2026 (Chennai edition, p. 18) [1].
• NPCI was represented by Additional Solicitor-General N. Venkataraman [1].
• The case challenges the government's decision to introduce a 0.4% MDR on P2M UPI transactions [1].
• NPCI's argument rests on scale: the growth "places correspondingly greater demands on the security, resilience, and infrastructural capacity of the system" [1].

3. Background & Evolution

• Zero-MDR regime on UPI: in March 2025 the government confirmed that UPI transactions carry zero MDR under the incentive scheme [2].
• Incentive scheme for low-value BHIM-UPI P2M transactions: 0.15% incentive on transactions up to ₹2,000 made to small merchants, so the government paid the cost instead of merchants [2].
• June 2025: the Finance Ministry publicly denied reports that it planned to charge MDR on UPI transactions [3].
• FY 2025-26: UPI processed about 241.62 billion transactions worth about ₹314 lakh crore [1].
• August 2026: 24.51 billion transactions worth about ₹29.82 lakh crore, the highest-ever monthly volume, averaging about 791 million transactions a day [1].
• 2026: the government reverses course and decides on a 0.4% MDR on P2M UPI. It is challenged in the SC, and NPCI defends it [1].
• Static context (not from sources retrieved this session; check before use): UPI was launched by NPCI in 2016. NPCI is an RBI and Indian Banks' Association initiative operating under the Payment and Settlement Systems Act, 2007. Zero MDR on UPI and RuPay was mandated from January 2020 through amendments made by the Finance Act, 2019.

4. Core Static Facts

Item	Fact
MDR	Fee paid by the merchant, not the customer, for accepting digital payments [1]
New rate	0.4% on P2M UPI transactions [1]
Share of transactions covered	About 4% of merchant transactions (NPCI's figure) [1]
Earlier regime	Zero MDR, plus a 0.15% government incentive on P2M payments ≤ ₹2,000 to small merchants [2]
Respondent defending the fee	National Payments Corporation of India (NPCI) [1]
Counsel for NPCI	ASG N. Venkataraman [1]
FY 2025-26 volume / value	About 241.62 bn transactions, about ₹314 lakh crore [1]
Peak month (Aug 2026)	24.51 bn transactions, about ₹29.82 lakh crore, about 791 mn/day [1]
Forum	Supreme Court of India [1]

• P2P vs P2M: P2P means Person-to-Person (transfers between individuals). P2M means Person-to-Merchant (payments to businesses). The 0.4% MDR applies to P2M [1].
• Not from whitelisted sources: media outside the whitelist report a ₹2,000 threshold for the new MDR, a per-transaction cap, rollout deferred to after Diwali 2026, the SC refusing an interim stay, and a petition under Articles 14 and 19(1)(g). Confirm these against NPCI or court records before using them.

5. Multi-Dimensional Analysis

Economic

• Zero MDR means the cost of processing falls on the exchequer through incentive schemes. NPCI argues this cannot last at more than 240 billion transactions a year [1][2].
• A fee on a small slice of transactions (about 4%) gives the system its own revenue, which can fund security and resilience upgrades [1].
• Risk: MDR may push some larger merchants back to cash, and costs may be passed on to customers through prices.

Social / Inclusion

• Under the earlier scheme, small merchants and low-value payments (≤ ₹2,000) were deliberately protected [2]. How well small vendors stay protected under the new regime is the main equity test.
• Free P2P transfers have been central to UPI's spread to the bottom of the pyramid.

Legal / Constitutional

• The challenge asks the SC to examine an economic policy decision. Courts usually defer on such matters unless the decision is arbitrary [1].
• Key question: whether an MDR is a commercial fee, a tax, or a regulatory levy, which decides whose legislative or executive authority is needed.

Technological / Governance

• At about 791 million transactions a day, the system has to invest continuously in uptime, fraud controls and cybersecurity [1].
• Sustainable funding of DPI is a model question for India Stack elsewhere: should public digital rails be free, or should they recover costs?

Fiscal / Administrative

• The move shifts the cost from a budgetary subsidy model (incentive scheme) to a user-pays model for large merchants [1][2].
• Policy credibility: the government denied MDR plans in June 2025 and introduced one in 2026 [1][3].

6. Recent Developments (last 12-18 months)

• June 2025: Finance Ministry denies any plan to levy MDR on UPI [3].
• FY 2025-26: UPI reaches about 241.62 bn transactions and ₹314 lakh crore [1].
• August 2026: record month of 24.51 bn transactions [1].
• 2026: government decides on a 0.4% MDR on P2M UPI, and a petition challenging it reaches the SC [1].
• November 2026: NPCI affidavit says zero MDR is unsustainable and the fee covers about 4% of merchant transactions [1].

7. Prelims Hooks

• MDR is paid by the merchant, not the consumer [1].
• New UPI MDR rate: 0.4%, on P2M transactions only [1].
• NPCI says the MDR will affect about 4% of merchant transactions [1].
• UPI's highest-ever monthly volume: August 2026, 24.51 billion transactions [1].
• Value in August 2026: about ₹29.82 lakh crore [1].
• Daily average in August 2026: about 791 million transactions [1].
• FY 2025-26 UPI volume: about 241.62 billion; value about ₹314 lakh crore [1].
• Earlier incentive scheme: 0.15% on BHIM-UPI P2M payments up to ₹2,000 to small merchants [2].
• The earlier scheme kept zero MDR on UPI for users and merchants [2].
• NPCI was represented in the SC by ASG N. Venkataraman [1].
• In June 2025 the Finance Ministry denied any plan to charge MDR on UPI [3].

8. How the Subsidy Shrank Before the Fee Arrived

• "Zero MDR" never meant zero cost. It meant someone else paid.
• The government's money for UPI incentives was ₹3,268 crore in FY24. For FY25 it approved ₹1,500 crore [6].
• The FY26 Budget cut it again, to ₹437 crore. That is 78% less than the ₹2,000 crore finally spent in FY25 [7].

• Volumes rose sharply over the same years (see the note's FY 2025-26 figures) [1]. So the money for each transaction fell much faster than the headline cuts suggest.

• The gap between the incentive and the real cost fell on banks and payment apps

• The Payments Council of India (PCI), the industry body of payment companies, put the yearly cost of running and expanding UPI at about ₹10,000 crore [6].
• The ₹1,500 crore incentive covered only a small part of that [6].

• In August 2025 RBI Governor Sanjay Malhotra said openly that UPI is "not free" and that the government is paying for it [10].

• So the 0.4% fee was the end of a long squeeze, not a sudden change

• In March 2025 PCI wrote to the PMO asking for a 0.3% MDR on large-merchant UPI payments [9].
• Even after the fee, the FY2026-27 allocation of ₹2,000 crore is far below the ₹20,000 crore the industry says is needed [8].
• Exam point: the true choice was never "free or paid". It was "taxpayer pays, banks pay, or big merchants pay".

9. Is 0.4% High? Comparing UPI With Cards and Brazil's Pix

• Against Indian debit cards, 0.4% is cheap
• For businesses with yearly turnover of ₹20 lakh or more, the MDR on non-RuPay debit cards is capped at 0.9% of the payment or ₹1,000, whichever is lower [5].

• So a big merchant moving from cards to UPI still pays less than half.

• Against Brazil's Pix, 0.4% is on the high side

• Pix is Brazil's instant payment system, run by its central bank. It is the closest foreign match to UPI.
• The IMF found a Pix payment costs merchants about 0.33% of the amount, against 1.13% for debit cards and 2.34% for credit cards [11].

• A World Bank case study puts the average Pix merchant price even lower, at about 0.15% [12].

• What Pix did differently: free for people, priced for business, from day one

• In Pix, individuals generally cannot be charged for sending money [12].
• Only the receiving bank pays a small fee, and banks are free to set their own charges to business [12].
• Because Pix itself earned banks little, they made money by selling other products on top of it, such as insurance and credit cards [12].

• India did the opposite. It made merchant payments free first and is now trying to add a price later. That is politically harder, because a price that was never charged feels like a new tax.

• Nobody has set the rate by a public cost formula

• RBI's 2022 discussion paper (a document put out for public comment) asked this very question: should UPI charges be fixed by a regulator or left to the market [4]?
• That question was never answered in public. The 0.4% figure came from a government decision, not from a published cost study [1][4].

10. The Case Against Charging Merchants, and Where It Falls Short

• The strongest objection: UPI grew because it was free
• Zero MDR has applied to BHIM-UPI and RuPay debit since January 2020, put into law through amendments to the Payment and Settlement Systems Act and the Income-tax Act [5].
• Critics say a fee breaks the promise that made shopkeepers accept QR codes. Large traders often work on thin margins, so 0.4% may push them back to cash or make them pass the cost on in prices.

• The government also denied any MDR plan in June 2025 [3]. A reversal within about a year makes merchants doubt future promises too.

• What the objection gets right

• Zero MDR was a legal promise, not just a scheme [5]. So the Supreme Court is right to ask whether the reversal followed the same legal route.

• A ₹2,000 cut-off creates an easy escape. A merchant can split one ₹5,000 bill into three smaller payments to avoid the fee. The rule may then raise less money than planned.

• Where it falls short

• The design protects the people the objection worries about. Business Standard reports the fee applies only to P2M payments above ₹2,000 [8].
• Small merchants collecting up to ₹1 lakh a month through UPI QR codes stay fully exempt [8].
• The fee is capped at ₹300 for payments of ₹75,000 or more, so very large bills are not hit in full [8].
• P2P transfers stay free [1]. That is the part that spread UPI to poorer households.

• Brazil shows a merchant fee and fast growth can go together [11][12].

• Honest verdict for an answer: the fee is defensible in design. Its weak points are the sudden reversal and the risk of payment-splitting, not the 0.4% rate itself.

11. What Should Follow: Cost Data, a Rate Review and Steady Funding

• NPCI and RBI should publish what UPI actually costs to run
• Today the cost figure depends on who you ask: ₹10,000 crore a year in one industry estimate, ₹20,000 crore in another [6][8].

• Without a public, checked number, nobody can say whether 0.4% is fair or too high. A court also has no clear basis to judge it.

• RBI should finish the 2022 exercise and fix a review method

• RBI's discussion paper already said payment providers must earn enough to keep running and invest in new technology [4].
• The next step is a rule for setting and reviewing the rate, for example every two years, based on cost.

• Brazil's central bank sets Pix business fees on a cost-recovery basis [12]. India can copy that idea: link the rate to cost, not to a one-time decision.

• The Finance Ministry should make small-merchant support predictable

• The incentive moved from ₹3,268 crore to ₹437 crore and back to ₹2,000 crore in about three years [6][7][8].

• Banks cannot plan investment on money that swings like this. A multi-year allocation, fixed in advance, would give them certainty.

• NPCI should watch for payment-splitting from the first month

• If many payments start sitting just under ₹2,000, the threshold is being gamed.
• NPCI already sees every transaction, so it can publish this data and the rule can be adjusted early.

12. Anchors for Answers

• Data: UPI incentive allocation fell from ₹3,268 crore (FY24) to ₹437 crore (FY26 Budget), a 78% cut from FY25's final ₹2,000 crore [6][7]
• Data: Industry estimates UPI's yearly running and expansion cost at about ₹10,000 crore; FY2026-27 allocation is ₹2,000 crore against ₹20,000 crore the industry says is needed [6][8]
• Data: Non-RuPay debit card MDR is capped at 0.9% or ₹1,000 for businesses with turnover of ₹20 lakh or more, which makes UPI's 0.4% cheaper [5]
• Report/Committee: RBI Discussion Paper on Charges in Payment Systems, August 2022: asked whether UPI charges should be set by a regulator or by the market [4]
• Law/Case: Zero MDR on BHIM-UPI and RuPay since January 2020, through amendments to the Payment and Settlement Systems Act, 2007 and the Income-tax Act [5]
• Comparison: Brazil's Pix is free for individuals to send money and charges only merchants (about 0.33% against 1.13% for debit and 2.34% for credit cards), with fees based on cost recovery [11][12]
• Scheme: Incentive scheme for low-value BHIM-UPI P2M transactions: 0.15% on payments up to ₹2,000 to small merchants, the budget support model the fee partly replaces [2]

13. Mains Relevance

• GS-III: Indian Economy (mobilisation of resources; inclusive growth; banking and payments); Science & Technology (IT and digital infrastructure).
• GS-II: Government policies and interventions; role of the judiciary in reviewing economic policy.
• Question stems: 1. "Zero-MDR UPI built India's digital-payments revolution but is fiscally unsustainable." Critically examine with reference to the recent levy of MDR on P2M transactions. 2. Discuss how Digital Public Infrastructure can be financed sustainably without undermining financial inclusion, with reference to UPI. 3. How far should courts scrutinise pricing decisions in public payment systems? Discuss with recent examples.

14. Related Topics to Study Next

• Payment and Settlement Systems Act, 2007: the legal basis for NPCI and RBI's oversight of payments.
• NPCI structure and products (UPI, RuPay, IMPS, BHIM, NACH): ownership and the not-for-profit model.
• RBI discussion paper on charges in payment systems (2022): the debate on UPI cost recovery.
• Incentive scheme for RuPay debit and low-value BHIM-UPI [2]: the subsidy model being replaced.
• UPI market-share cap / concentration risk among third-party apps: a parallel sustainability concern.
• Digital Public Infrastructure and India Stack (G20 framing): global export of UPI.
• UPI internationalisation (NIPL, links with Singapore, UAE, France): the cross-border dimension.
• Cybersecurity and digital payment fraud: the resilience costs NPCI cites [1].

15. NCERT Concepts to Revise

• Merchant discount rate (Economy): The fee at the centre of the case: what merchants pay to accept digital payments.
• Unified Payments Interface (Economy): UPI is the payment system on which the 0.4% fee is being imposed.
• National Payments Corporation of India (Economy): NPCI runs UPI and is the body defending the fee before the Supreme Court.
• Digital public infrastructure (Polity): The core debate is whether public digital rails like UPI should be free or recover costs.
• Subsidy (Economy): Zero MDR meant the government paid through incentives; NPCI says that subsidy burden on the exchequer is unsustainable.
• Financial inclusion (Economy): Free small payments helped spread UPI; the fee tests whether small merchants stay included.

16. Common Errors / Trap Areas

• Who pays: MDR is levied on the merchant, not the customer. Do not describe it as a "UPI tax on users".
• 0.4% vs 4%: 0.4% is the rate. About 4% is the share of merchant transactions affected [1].
• P2P vs P2M: the fee applies to P2M, not P2P transfers [1].
• Incentive vs MDR: the 0.15% figure was a government incentive paid to banks under the earlier scheme, not a fee on merchants [2].
• NPCI is not a government ministry or a statutory regulator. It is a not-for-profit operating under RBI oversight (static fact; verify). The policy decision was the government's, and NPCI defended it in court [1].