NPCI’s New MDR Framework for UPI Payments: Key Provisions and Challenges

Context

1. UPI MDR: In an affidavit filed on 3 November 2026, NPCI defended the 4% Merchant Discount Rate (MDR) on specified P2M UPI transactions above ₹2,000, effective 15 October 2026, stating that it is necessary to sustain the UPI ecosystem and cannot be passed on to customers.
2. Court Status: On 28 September 2026, the Supreme Court declined to stay the framework and sought responses from the Centre, RBI and NPCI. The case is ongoing.

About NPCI (National Payments Corporation of India)

1. Nature & Setup: An umbrella organization for retail payments, created in 2008 as a Not-for-Profit Company (under the Companies Act) by the RBI (Reserve Bank of India) and IBA (Indian Banks’ Association).
2. Legal Basis: Functions under the PSSA (Payment and Settlement Systems Act, 2007), which gives the RBI full power to regulate payment systems.
3. Promoters: Initially set up by 10 core banks (6 Public Sector, 2 Private Sector, and 2 Foreign Banks).
4. Core Objectives: Aims to provide low-cost and interoperable payment solutions, drive digital payments, and boost financial inclusion across the country.

Key NPCI Initiatives

1. UPI (Unified Payments Interface): Powers instant mobile-based P2P (Peer-to-Peer) and P2M (Peer-to-Merchant) real-time money transfers.
2. RuPay (2012): India’s indigenous domestic card network offering debit, credit, and prepaid cards.
3. IMPS (Immediate Payment Service): Provides 24×7 real-time interbank fund transfers, operational even on bank holidays.
4. BBPS (Bharat Bill Payment System): Delivers a standardized, interoperable platform for utility bill payments.
5. AePS (Aadhaar Enabled Payment System): Facilitates doorstep basic banking (cash withdrawal, balance inquiry) using biometric authentication.
6. NFS (National Financial Switch): Interconnects bank ATMs (Automated Teller Machines) nationwide to allow inter-bank cash withdrawals.
7. NETC (National Electronic Toll Collection): Powers contactless toll collection at highways via FASTag using RFID (Radio Frequency Identification) tech.

Understanding MDR (Merchant Discount Rate)

1. Core Concept & Baseline Policy

1. Definition: A processing fee paid by merchants to acquiring banks for facilitating digital transactions, shared among issuing banks, payment networks, acquiring banks, and third-party UPI apps.
2. Zero MDR Mandate: Introduced under Section 10A of the PSSA (Payment and Settlement Systems Act, 2007) in 2020, completely waiving MDR on UPI and RuPay debit card transactions to promote digital adoption.

2. Updated Framework (2026 Revision)

1. New Rate Structure: Applies a 0.4% MDR on specified P2M (Peer-to-Merchant) UPI transactions exceeding ₹2,000.
2. Fixed Maximum Cap: Capped at a maximum ceiling of ₹300 per transaction for high-value payments of ₹75,000 and above (e.g., a ₹1,00,000 purchase incurs a ₹300 fee rather than ₹400).
3. Category-Specific Concessions:

• Flat Concessional Rate: Set at a flat ₹5 per transaction (above ₹2,000) for essential/thin-margin sectors including fuel, railways, telecom, insurance, and utilities.
• Capital Markets: Concessional 02% MDR (capped at ₹300) for mutual funds, stockbrokers, and equities.

1. Transaction Coverage: Applies to only ~2.5–4% of total P2M transactions; the remaining ~96% (up to ₹2,000) stay completely free. All P2P transfers remain zero-rated.
2. Key Exemptions: Retains Zero MDR for small merchants under the P2PM (Person-to-Person-Merchant) category receiving up to ₹1 lakh monthly via UPI QR codes.
3. Legal & Implementation Basis: Issued via Ministry of Finance notifications under Section 10A, followed by operational guidelines from NPCI.
4. Collection & Fund Allocation: Collected by commercial banks and payment aggregators as a service charge (zero government revenue); 5% of total MDR collections are allocated to a dedicated fund to promote small-merchant digital adoption.

NPCI’s Defence in the Supreme Court (SC)

1. System Sustainability: Argued that MDR revenue is necessary to support, upgrade, and secure UPI infrastructure, which operates with almost no direct earnings.
2. Consumer Protection: Stated that merchants cannot pass MDR costs onto customers, and UPI apps are barred from charging additional platform fees on UPI transactions.
3. Limited Market Impact: Stressed that MDR applies to a tiny fraction of transactions (~2.5–4% of P2M payments), preventing price rises for ordinary shoppers.
4. Legal & Constitutional Objections:

• Claimed NPCI is not a ‘State’ under Article 12, meaning a Writ Petition under Article 32 is not maintainable against it.
• Argued that Section 10A of the PSSA (Payment and Settlement Systems Act, 2007) does not directly fix MDR rates or authorize executive rate-setting.

     5. Supreme Court’s Concern: Asked the Central Government to clarify the exact legal basis of the charge—specifically whether it is classified as a tax or a fee.

Significance

1. Infrastructure Viability: Creates a clear revenue stream to maintain UPI security, server uptime, smooth operations, and future innovations.
2. Financial Inclusion: Mandatory zero-MDR rules on small transactions (up to ₹2,000) and small sellers protect affordable digital payments for common users.
3. Regulatory & Legal Clarity: Raises important legal questions about the powers of the government and payment bodies to levy charges without explicit statutory backing.

Key Challenges

1. Hidden Pass-Through: Merchants may indirectly shift MDR costs to buyers by inflating prices or discouraging UPI use.
2. Merchant Behavioural Shift: High-value sellers might actively push customers toward cash or non-digital payments to avoid transaction fees.
3. Legal Ambiguity: Lacks legislative clarity on whether MDR counts as a user fee, tax, or administrative service charge.
4. Enforcement Bottlenecks: Difficult for regulators to track compliance and enforce the no-pass-through mandate across millions of merchants.

Way Forward

1. Statutory & Legal Basis: Create explicit legal provisions under the PSSA (Payment and Settlement Systems Act, 2007) to authorize rate-setting.
2. Robust Monitoring: Strengthen regulatory tracking and grievance redressal mechanisms to block illegal cost pass-through.
3. Protective Exemptions: Retain zero-MDR rules for small-value transactions and small sellers, with periodic updates to threshold limits.
4. Sustainable Funding Models: Explore alternative revenue-sharing frameworks and government incentives to maintain UPI infrastructure without burdening users.

FAQs

Q1. What is NPCI?
Ans. A not-for-profit umbrella organisation for retail payments, established in 2008 by RBI and IBA.

Q2. What is the Merchant Discount Rate?
Ans. A fee paid by merchants to their banks for accepting digital payments, shared among banks, networks and service providers.

Q3. Can merchants pass the MDR to customers?
Ans. No, merchants cannot pass MDR to customers, and UPI apps cannot levy platform fees.

Q4. Which law provided for zero MDR on UPI and RuPay debit cards?
Ans. Section 10A of the Payment and Settlement Systems Act, 2007.