Fintech Weekly Deep Dive — NPCI Defends the UPI MDR in the Supreme Court: The Week Free Rails Went on Trial | Week of November 2–8, 2026

Executive Summary

This week, the National Payments Corporation of India (NPCI) filed its counter-affidavit in the Supreme Court defending the 0.4% Merchant Discount Rate (MDR) on UPI person-to-merchant (P2M) transactions above ₹2,000 — the fee that, when it goes live on a date yet to be notified, will end more than six years of fully free merchant UPI. Filed November 3 and reported through the week, the affidavit argues that the charge touches only about 4% of P2M transactions, that 96% stay free, that merchants are “strictly prohibited” from passing the fee to customers, and that violations are enforceable through contract — up to termination of a payment provider’s UPI membership.¹ The Union government’s own affidavit, filed the same week, told the Court that merchants were “never assured of zero MDR on UPI indefinitely,” and that a charge which reduces a merchant’s profit margin does not violate Articles 14 or 19(1)(g) of the Constitution.²

The filings are the sharpest public articulation yet of why India decided to stop subsidising its payments infrastructure — and of how hard it is to charge for something users were told was free. Behind NPCI’s defence sits an arithmetic the government itself supplied to Parliament: the Ministry of Finance estimates the industry’s UPI operating cost at ₹20,700 crore a year, while the FY 2026-27 budget allocates ₹2,000 crore — roughly 11% of actual costs — under the incentive scheme that was supposed to keep the rails free.³ The subsidy peaked at ₹3,631 crore in FY24, was cut 82% in the next budget, and was never designed to scale with a network that this very month processed a record 25.47 billion transactions worth ₹31.53 lakh crore.⁴⁵

The key takeaway for consumers and merchants alike: nobody’s UPI payment gets a new line item — P2P transfers stay free at any value, and payments up to ₹2,000 to any merchant stay free — but the quiet battle is over who absorbs the ₹2.45 lakh crore-plus annual fee pool that CareEdge estimates the 0.4% rate implies at current volumes.⁶ NPCI says the merchant, contractually and absolutely. Merchants say it will arrive through prices, refusals and workarounds no affidavit can stop. The Supreme Court, which refused a stay on September 28 and asked the government to explain “the executive scope of making this expropriation,” now holds the question of whether India’s most successful public digital good can survive its own success without a price tag.⁷

The Story in Depth

Context: How UPI became free, and why that ended

The zero-MDR era began on January 1, 2020, when the government amended Section 10A of the Payment and Settlement Systems Act, 2007 to prohibit banks and payment providers from charging any MDR on RuPay debit cards and BHIM-UPI merchant payments. The amendment was deliberately wired to Section 269SU of the Income-tax Act — the provision compelling businesses above a turnover threshold to offer digital payment modes — so that the statutory ban covered exactly the channels the government wanted to push. This was not a subsidy dressed as a rule; it was a flat prohibition on charging merchants, the single biggest catalyst for UPI’s merchant adoption.⁸

The cost did not disappear. The Payments Council of India estimated the ecosystem was losing ₹5,500 crore a year under zero-MDR; an RBI discussion paper in August 2022 estimated processing costs of about ₹2 per ₹800 transaction before the Finance Ministry publicly walked back the paper within days, declaring “there is no proposal to levy any charges on UPI transactions.”⁸ In place of charges, the government ran an incentive scheme: payouts of ₹1,389 crore in FY22, ₹2,210 crore in FY23 and a peak of ₹3,631 crore in FY24 — against an industry cost estimate several times higher. Budget 2025 then signalled the endgame, slashing the allocation to ₹437 crore for FY26, an 82% cut.⁸

The legislative door reopened in 2026. A June 5 ordinance, replaced by the Taxation and Other Laws (Amendment) Bill passed by Lok Sabha on August 6, rewrote Section 10A: instead of banning MDR on modes prescribed under Section 269SU, the government could now specify by gazette notification which modes stay free — and, implicitly, let everything else be charged. Finance Minister Nirmala Sitharaman told the House that “MDR is applied exclusively on merchants, not on end users. No decision has been taken yet on UPI charges.”⁸ That decision came within weeks. On September 14, notification S.O. 5067(E) drew the line in the Gazette: RuPay debit and UPI transactions up to ₹2,000 are protected — charging on them, directly or indirectly, is barred. Every UPI merchant transaction above ₹2,000 became legally chargeable.⁹

On September 15, NPCI circularised the framework the amendment was built for: a 0.4% MDR on P2M transactions above ₹2,000, capped at ₹300 for tickets of ₹75,000 and above; a flat ₹5 for railways, telecom, insurance, fuel and agricultural inputs above ₹2,000; and a concessional 0.02% for mutual funds and securities transactions. Person-to-person transfers stay free at any value; small merchants receiving up to ₹1 lakh a month through UPI QR codes stay at zero MDR entirely.⁶¹⁰ The framework was to take effect October 15 — and then politics intervened. After a September 30 meeting between roughly twenty trade leaders and the Finance Minister, and with CAIT calling a festive-season levy “an avoidable burden on merchants operating on thin margins,” NPCI deferred the rollout to a post-Diwali date, with reports pointing to January 1, 2027.¹¹¹²

The legal challenge arrived in between. Advocate Anjan Datta filed a PIL — Anjan Datta v. Union of India, W.P.(C) Diary No. 8737/2026 — attacking all three pillars at once: the Section 10A amendment itself, the September 14 notification, and NPCI’s September 15 circular. On September 28, a bench headed by Chief Justice Surya Kant issued notices to the Centre, RBI and NPCI, sought responses on affidavit, and refused an interim stay — while pointedly asking from the bench, “what is the executive scope of making this expropriation? What is the character?”⁷¹³

What happened this week

Into that framework stepped the State’s answers. NPCI’s counter-affidavit, filed November 3, makes four moves.¹

First, it shrinks the incidence. “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.” Around 70% of UPI transactions are P2P and roughly 96% of P2M transactions are ₹2,000 or below — both categories stay free. The 0.4% ceiling, NPCI notes, “is far lower than the charges imposed by other system providers for credit cards and debit cards.”¹

Second, it forecloses pass-through — by contract rather than by statute. The non-pass-through directive to banks and UPI apps 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.” Non-compliance “exposes such Payer PSP or TPAP to compliance actions which may also lead to termination of its UPI membership and facilities.” UPI apps equally cannot levy platform fees on users.¹

Third, it argues the charge is redistribution, not extraction: 5% of every participant’s MDR share funds a dedicated adoption fund for small merchants with annual turnover up to ₹20 lakh. “The very class of small merchants and street vendors whom the Petitioner fears will bear this indirect burden… is the class the MDR Framework… goes out of its way to shield.”¹

Fourth, it raises a jurisdictional wall: NPCI is not “State” under Article 12, so the petition under Article 32 — which enforces fundamental rights — cannot lie against it. The constitutional arguments under Articles 14 and 19(1)(g), NPCI says, are only available against State actors. On the merits, it leans on the Parliamentary Standing Committee on Finance’s Thirty-Second Report, which found the ₹2,000 crore FY27 allocation covered just 11% of industry’s actual costs and 14% of potential MDR collections, and recommended a “self-reliant, tiered revenue model.”¹

The Centre’s affidavit, filed in the same window, complements rather than contradicts. Merchants “were never assured of zero MDR on UPI indefinitely”; the Constitution “does not guarantee that commercial infrastructure must remain free of cost”; MDR is “neither a tax nor a fee imposed by the government”; and a charge that trims a profit margin is not, by itself, a fundamental-rights violation.²

What the filings did not do is give a go-live date. NPCI told the Court implementation “has since been postponed”; reports through the week still pointed to January 1, 2027, while payment aggregators and sponsor banks continue negotiating how to split the acquirer’s share — PAs are reportedly asking for 50–80% of it.¹² The Supreme Court has approved nothing: no stay, but no validation either. The framework hangs, unenforceable in calendar time, awaiting both a notification and a judgment.¹³

Why it matters

The sustainability argument is real, and the government’s own numbers prove it. The strongest fact in NPCI’s affidavit is one its opponents cannot easily dispute, because the Ministry of Finance supplied it to Parliament: ₹20,700 crore in estimated annual industry operating cost against ₹2,000 crore of budgeted support — under 11% coverage.¹³ No tax-funded subsidy at any historically generous level closes that gap on a network growing 23% a year in volume. Either users eventually pay through merchants, or the state pays forever, or quality erodes. The Standing Committee, a multi-party body, effectively endorsed the first option. This is the honest core of the case, and it deserves to be stated plainly by defenders and critics alike.

But the pass-through prohibition is the framework’s weakest joint — and everyone involved knows it. NPCI’s argument that a fee on 4% of transactions is too occasional for merchants to “recalibrate their pricing” is economically fragile. Merchants do not price per payment instrument; they price to blended costs. A large merchant paying 0.4% on the UPI slice of its receipts will fold that into the same menu of prices it sets for cash and card customers — which is precisely the “quiet revision of prices” the affidavit calls “misconceived.” The Hindu’s coverage caught the ecosystem’s own defence of the fee with unusual candour: the MDR was imposed “to save the UPI ecosystem from turning ouroboric” — a system consuming itself.¹⁴ The ouroboros metaphor cuts both ways: a fee designed to save the rails, enforced by a prohibition on doing the one thing merchants do with costs.

There is precedent for the prohibition working. RBI’s 2017 debit-card rules barred merchants from passing MDR to customers, and lawyers have pointed to that regime as the template for UPI enforcement.¹⁵ But card-MDR enforcement targeted the visible surcharge, not the invisible price rise — and even the visible surcharge persists in the wild. NPCI’s contractual remedy (suspend the PSP, terminate membership) punishes intermediaries, not merchants. The shopkeeper who adds a “UPI charge” line to a ₹3,000 bill breaches scheme rules, but the mechanism that reaches him is murky; the CA community has already flagged that “the consequence for a merchant who breaches it above the ₹2,000 line is less clearly spelt out.”¹⁶

The money is large enough to reshape the industry. CareEdge’s sizing — 67.2% of P2M value sits above ₹2,000, so every 10 basis points is worth roughly ₹6,113 crore a year — implies the 0.4% rate yields a gross pool north of ₹24,500 crore annually at FY26 volumes.⁶ Reported splits (issuers ~40%, third-party app providers ~30%, acquirers ~30%) would channel meaningful revenue to PhonePe, Google Pay and the banks for the first time in six years — and the ongoing PA-vs-bank negotiation over the acquirer’s share shows every intermediary understands what is at stake.¹² The week’s other big payments story makes the same point from the capital-markets side: Razorpay secured SEBI approval for a ₹5,000–6,000 crore IPO at a ~$5 billion valuation — a third below its 2021 mark — and public-market investors will now get audited disclosure of exactly what MDR does to payments-industry unit economics.¹⁷ “Sustained investment in technology, cybersecurity, fraud prevention and reliability is required to scale UPI to 90% of all retail payments. MDR will allow for this investment,” Pine Labs CEO Amrish Rau said when the framework was announced; the RBI called it “an important step towards strengthening the long-term sustainability of India’s digital payments ecosystem.”¹⁸

The October record frames both sides. UPI closed October at 25.47 billion transactions worth ₹31.53 lakh crore — first month past 25 billion, first past ₹30 lakh crore, and first with average daily value above ₹1 lakh crore (₹1,01,707 crore), on 822 million daily transactions — even with the fee unimplemented.⁴⁵ To NPCI, that scale is why the rails need their own revenue: infrastructure for 89% of India’s digital payments cannot run on a shrinking subsidy. To the petitioners and merchant bodies, it is why the fee is unnecessary: the network won the market precisely because it was free, and taxing the winning channel now taxes the habit the state spent a decade building. AIMRA’s “No UPI Day” on Gandhi Jayanti — retailers covering QR codes in black cloth — showed how quickly sentiment can flip from adoption medal to grievance.¹⁹

Data & Metrics

• The fee: 0.4% MDR on UPI P2M transactions above ₹2,000; capped at ₹300 per transaction for tickets ≥ ₹75,000; flat ₹5 for railways, telecom, insurance, fuel and agri inputs; 0.02% (capped ₹300) for mutual funds and securities transactions.⁶¹⁰
• Who stays free: all P2P transfers at any value (~70% of UPI volume); P2M payments up to ₹2,000 (~96% of P2M volume by NPCI’s count, ~95% by the Ministry FAQ’s); small merchants receiving up to ₹1 lakh/month via UPI QR — the P2PM category — at zero MDR regardless of ticket size.¹⁶
• October 2026 records: 25.47 billion transactions; ₹31.53 lakh crore value; ₹1,01,707 crore average daily value (first time above ₹1 lakh crore); 822 million average daily transactions; +23% volume and +16% value year-on-year. UPI handles ~89% of India’s digital payments.⁴⁵
• The funding gap: Ministry of Finance estimate of ₹20,700 crore annual industry operating cost, against ₹2,000 crore FY27 budget allocation — 11% of costs, 14% of potential MDR collections (Standing Committee 32nd Report, cited in NPCI’s affidavit).¹³
• Subsidy arc: ₹1,389 cr (FY22) → ₹2,210 cr (FY23) → ₹3,631 cr (FY24 peak) → ₹1,500 cr (FY25) → ₹437 cr (FY26 budget, an 82% cut) → ₹2,000 cr (FY27).
• Fee pool sizing: CareEdge: 67.2% of P2M value above ₹2,000; each 10 bps ≈ ₹6,113 crore/year; 0.4% implies a ₹24,500+ crore annual gross pool at FY26 volumes.⁶
• Reported revenue split: issuing banks ~40%, TPAPs ~30%, acquiring banks ~30%; PAs seeking 50–80% of the acquirer’s share in ongoing negotiations.¹²
• Comparators: credit-card MDR runs ~2–3% and debit cards ~0.3–0.9%; NPCI’s 0.4% is deliberately pitched below both. RBI’s 2022 paper estimated ₹2 processing cost per ₹800 UPI transaction (~0.25%).¹⁸

Expert Views

NPCI, through Additional Solicitor General N. Venkataraman, told the Court the 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” — and that a framework which “excludes small merchants from the charge altogether, and… 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.”¹

The Centre argued merchants were “never assured of zero MDR on UPI indefinitely,” that the Constitution “does not guarantee that commercial infrastructure must remain free of cost,” and that MDR is “neither a tax nor a fee imposed by the government.”²

Petitioner Anjan Datta’s prayer asks for the framework to be reconsidered “following transparent consultation, publication of relevant empirical data and an impact assessment,” with any MDR classification weighing merchant turnover, MSME status, actual margins and geography — a demand for evidence, not just repeal.¹³

CAIT welcomed the deferral as “timely and pragmatic,” arguing “additional transaction costs could have placed an avoidable burden on merchants operating on thin margins and discouraged the wider acceptance of digital payments” — after its September 30 delegation to the Finance Minister.¹¹ AIMRA went further, with mobile retailers symbolically shrouding QR codes on “No UPI Day.”¹⁹

Industry was frank about the motive. Pine Labs CEO Amrish Rau: “Sustained investment in technology, cybersecurity, fraud prevention and reliability is required to scale UPI to 90% of all retail payments. MDR will allow for this investment.” RBI: an “important step towards strengthening the long-term sustainability of India’s digital payments ecosystem,” while stressing UPI stays free for consumers.¹⁸

The Policy Circle analysis (Prachi Khanna and Shivani Chaudhry) put the policy problem neutrally: the framework “seeks to make digital payments sustainable, but policymakers must ensure higher costs do not push small” merchants out of digital acceptance — the funding gap being “less than one-tenth” of the Standing Committee’s cost estimate.³

Consumer Impact

What does not change: your P2P transfers at any value; any merchant payment up to ₹2,000; purchases from small QR merchants receiving under ₹1 lakh a month; recurring payments via UPI AutoPay mandates; and your UPI app cannot add a platform fee — NPCI’s affidavit bars that explicitly.¹⁶

What changes when the fee goes live (reported for January 1, 2027): the merchant, not you, pays 0.4% on eligible tickets — ₹12 on a ₹3,000 payment, ₹200 on ₹50,000, ₹300 maximum on ₹75,000+.¹⁰ NPCI’s position is that you pay the posted price and nothing more; a merchant who adds a “UPI charge” or “digital payment surcharge” line is violating the framework NPCI is defending in court. If you see one, push back at the counter and report it through your PSP app’s grievance channel — the enforcement mechanism exists, but it only works if violations are reported.

The cost you will not see: the honest version of the pass-through debate is that some of the 0.4% will reach consumers through prices, not surcharges — blended pricing means cash and UPI customers share the fee’s weight. No affidavit stops that, and no rule requires disclosing it. Watch for subtler behaviour too: card-only nudges at high-value counters, requests to split a ₹6,000 payment into three ₹2,000 ones (which would take a ₹2,000+ ticket out of scope but also serialise fraud risk), or QR codes quietly disappearing above certain ticket sizes.

Net assessment: for the vast majority of everyday usage — the chai, the auto fare, the ₹1,800 grocery run — nothing changes. The consumers most exposed are those making large P2M payments to mid-size merchants: jewelley, electronics, travel, school fees. There the realistic risks are price drift and payment-option friction, not direct charges.

Looking Ahead

1. The go-live notification. NPCI has committed to a post-Diwali start “on a date to be notified”; reports converge on January 1, 2027. Until the notification lands, every bank and PA’s fee engine stays configured but switched off — and any premature charging is a compliance event.¹²
2. The next court date. With Centre, RBI (awaiting its affidavit’s public reporting) and NPCI filings in, the case moves to hearing. Watch for three signals: whether the Court buys NPCI’s Article 12 objection (removing NPCI from writ jurisdiction would gut much of the challenge); whether it demands the impact assessment and empirical data the petitioner seeks; and whether it tests the enforceability of the pass-through ban against the economic reality of blended pricing.¹¹³
3. The revenue-share settlement. The PA-vs-acquirer-bank negotiation (50–80% demand) must close before go-live; its outcome decides how much of the new pool actually funds merchant-facing distribution versus bank balance sheets.¹²
4. Enforcement mechanics. Whether NPCI publishes a pass-through complaint mechanism with named penalties — the 2017 debit-card precedent suggests visible surcharges can be policed; the question is whether UPI’s version gets teeth before merchants test it.¹⁵
5. The next dominoes. RuPay debit cards remain zero-MDR while UPI charges — an anomaly rational pricing will eventually touch; and NPCI’s 30% market-share cap for third-party apps hits its compliance horizon in December 2026, just as MDR revenue makes the top apps’ stakes larger.⁸

The deeper question the Court will eventually face is the one the ouroboros headline circled: can a public digital good that won the world by being free learn to charge without un-becoming itself? This week’s filings are the State’s best attempt to say yes — 4% of transactions, shielded small merchants, contract-enforced no pass-through, a reinvestment fund. Consumers should read them not as a promise that nothing will change, but as the opening bid in the negotiation over who pays for the next billion transactions. The ₹20,700 crore gap is real; the only open question is how it gets filled — by merchants’ margins, by prices, by the exchequer, or by a court’s pen.

Sources

• LiveLaw — Merchants Cannot Pass On UPI Charges To Customers, MDR Necessary To Sustain UPI Ecosystem: NPCI Tells Supreme Court
• Hindustan Times — Merchants were never assured of zero MDR on UPI indefinitely: Govt to Supreme Court
• The Hindu — NPCI says MDR charge has been imposed to save the UPI ecosystem from turning ‘ouroboric’
• Moneycontrol — NPCI defends MDR charges in SC, says merchants can’t pass on them to customers
• The Print — MDR charges needed to sustain UPI ecosystem, merchants can’t pass them to customers: NPCI tells SC
• PTI via Rediff — NPCI Defends UPI MDR Charges in SC
• Ministry of Finance, DFS — FAQs on MDR on Select UPI (P2M) Transactions (primary document, PDF)
• Mint — UPI average daily transaction value crosses ₹1 lakh crore for first time in October
• Indian Startup News — ‘Rs 1 lakh crore+ per day’: UPI breaks four records in October amid 0.4% merchant fee delay
• Times of India — MDR on UPI transactions over Rs 2,000 deferred; to come into effect post Diwali
• New Indian Express — NPCI defers 0.4% MDR until after Diwali; traders welcome the move
• The Hindu — Mobile phone retailers to protest against UPI MDR charges on October 2 (AIMRA No UPI Day)
• ABP Live — UPI Charges From January 2027? MDR Rollout May Be Deferred From October 15 (PA revenue-share negotiations)
• Policy Circle — UPI MDR Charges: The case for a sustainable payment system (Standing Committee cost estimates)
• ETGovernment — UPI’s Zero-Fee Model Overhauled as NPCI Introduces 0.4% MDR (Amrish Rau, RBI quotes)
• Business Standard — Debit card rule may act as template to shield UPI users from MDR fee
• News18 — ‘Far Lower Than Other Charges’: NPCI Defends UPI MDR (membership-termination enforcement)
• Business Standard coverage compiled in CashlessConsumer UPI MDR Timeline — zero-MDR history, incentive-scheme payouts, Budget cuts, August 2026 amendment, September notifications
• BW Disrupt — Supreme Court Issues Notices To RBI, NPCI Over UPI MDR Framework (petitioner’s prayers)
• Economic Times — Festive spending drives record UPI transactions in October
• CNBC-TV18 / Business Standard — Razorpay gets SEBI nod for ₹5,000–6,000 crore IPO at ~$5 billion valuation