The Supreme Court of India on September 28, 2026, made a pivotal decision regarding the future of digital payments in the country. A bench headed by the Chief Justice refused to grant an interim stay on the Union Government's plan to introduce a 0.4% Merchant Discount Rate (MDR) on specific Unified Payments Interface (UPI) transactions. This means the new fee structure is set to proceed as planned, starting from October 15.
The legal challenge arose through a Public Interest Litigation (PIL) which argued that the imposition of such a charge is arbitrary. The petitioner claimed that the levy qualifies as neither a tax nor a fee for a service, but rather an "unauthorized extraction" from the digital ecosystem. Despite these arguments, the Supreme Court opted not to interfere with the policy at this stage, choosing instead to seek a formal explanation from the regulators.
- Transaction Threshold — The fee applies only to merchant payments exceeding ₹2,000
- Excluded Categories — Approximately 96% of all UPI transactions remain free for users
- Regulatory Response — The RBI and NPCI must file detailed affidavits within four weeks
According to the National Payments Corporation of India (NPCI), the vast majority of users will not be affected by this change. The government has clarified that 96% of all UPI transactions fall below the ₹2,000 threshold and will remain entirely free of charge. The 0.4% levy is specifically targeted at high-value merchant transactions to help sustain the infrastructure required for the massive volume of digital payments in India.
The Reserve Bank of India (RBI) has long debated the sustainability of the "zero MDR" policy, which was initially introduced to encourage the adoption of digital payments. While the policy was successful in making India a global leader in real-time payments, banks and payment service providers have frequently voiced concerns over the lack of revenue to maintain the security and speed of the UPI network. This new charge is seen as a middle-ground solution.
In its notice, the Supreme Court has asked the Ministry of Finance, the RBI, and the NPCI to explain the rationalization behind the 0.4% figure. The court wants to understand if there is a statutory basis for the levy and how the revenue generated will be utilized. The respondents have been given a period of four weeks to file their affidavits, after which the court will resume the hearing to decide on the final legality of the charge.
Merchant associations have expressed mixed reactions to the news. While large retailers may absorb the cost, smaller vendors who occasionally handle transactions above ₹2,000 fear that the 0.4% cut will eat into their already thin margins. There are also concerns that merchants might start discouraging UPI payments for larger amounts, potentially pushing customers back toward cash or credit cards, the latter of which often carry even higher MDRs.
The Payment and Settlement Systems Act, 2007 is likely to be at the center of the upcoming legal battle. The petitioners argue that the NPCI, as a non-profit entity, does not have the mandate to impose such commercial levies without explicit legislative backing. On the other hand, the Centre is expected to argue that the charge is necessary for the technological upkeep of the UPI rails, which now handle billions of transactions every month.
As the October 15 deadline approaches, the digital payment industry is bracing for the implementation. Fintech giants like PhonePe, Google Pay, and Paytm will need to update their systems to reflect the new MDR for merchants. What followed the court's refusal to stay the order was a sense of cautious anticipation, as the final verdict could set a significant precedent for how digital public infrastructure is funded in India.
