The Supreme Court of India has sought responses from the Central Government, the Reserve Bank of India (RBI), and the National Payments Corporation of India (NPCI) in a petition challenging the legal basis of the newly introduced Merchant Discount Rate (MDR) on certain Unified Payments Interface (UPI) transactions.
The matter was heard by a bench led by Chief Justice Surya Kant. The petition challenges the government's notification introducing a 0.4% MDR on specified person-to-merchant (P2M) UPI transactions exceeding ₹2,000, scheduled to come into effect from October 15, 2026.
During the hearing, the Court questioned the statutory authority under which the MDR framework had been introduced. The bench observed that if the levy is a fee, its legal source must be identified, and if it is not a fee, the government must clarify its legal character.
The petitioner argued that the MDR framework lacks adequate legal safeguards, transparency, and consultation. The plea seeks either the quashing of the notification or a reconsideration of the framework following stakeholder consultation and impact assessment.
Appearing for the Centre, the Additional Solicitor General submitted that the government would not receive any revenue from the MDR. According to the government, the charge is intended as a settlement mechanism among payment ecosystem participants, including banks and payment service providers facilitated through NPCI.
The Centre further argued that the measure affects only a limited category of merchant transactions, while person-to-person UPI transfers and several exempt categories would continue to remain free.
The Supreme Court declined to stay the implementation of the framework at this stage, noting that the issue involves economic policy considerations. However, it directed the Centre, RBI, and NPCI to file detailed responses explaining the legal basis and operational structure of the MDR regime.
The matter assumes significance as it concerns the future regulatory framework governing India's digital payments ecosystem and the balance between financial sustainability and the objective of promoting cashless transactions.