NPCI says the MDR fee was imposed to save the UPI ecosystem from turning ouroboric

The National Payments Corporation of India (NPCI) has said in the Supreme Court that a “zero merchant discount rate (MDR)” for all Unified Payments Interface (UPI) transactions is no longer sustainable as the operational costs of India’s phenomenally growing digital payments industry would burn into the exchequer.

UPI processed as many as 24.51 billion transactions with a cumulative value of approximately ₹ 29.82 crore in the month of August 2026 alone, marking the highest ever monthly volume. On average, approximately 791 million transactions were processed each day in a given month. In the financial year 2025-26, UPI processed around 241.62 billion transactions worth around ₹314 crore, NPCI said.

“The numbers illustrate not just growth, but growth of a magnitude that places correspondingly higher demands on the security, resilience and infrastructural capacity of the system,” NPCI, represented by Additional Advocate General N. Venkataraman, told the court.

The company was responding to a court challenge to the government’s decision to impose an MDR of 0.4% on merchant-to-merchant (P2M) UPI transactions above ₹2,000.

People-to-people (P2P) transactions, which account for 70% of the total value of UPI transactions, would remain completely free irrespective of the amount, NCPI said. Individuals would not be charged any transaction or platform fee or any other fee for sending or receiving money through UPI, he added.

It said merchant-to-merchant (P2M) payments up to ₹2,000 will remain “completely MDR-free”. “This threshold is set to protect the vast majority of low-value everyday merchant payments made by both ordinary consumers and small merchants,” NPCI said.

The affidavit assured that the revised MDR framework targeted only higher-value business without disrupting the low-value transactions that drive mass adoption of UPI.

The MDR charge, which did not exceed 0.4%, would apply to P2M transactions above ₹2,000. “In reality, MDR will cover only about 4% of business transactions and about 96% of all P2M will remain unaffected,” NPCI said.

NPCI countered the petitioners’ contention that the revised MDR framework should have been introduced only through new legislation and not just through the notification in September.

NCPI argued that the MDR is not a tax, cess, charge, duty or any other statutory charge imposed by or under a legislative enactment. It was apparently a “fee” that was levied to defray the huge costs associated with running the payment system, and instead was shared entirely among the participants in the UPI ecosystem.

“MDR is a fee levied by system participants to meet the costs incurred in operating the payment system and not imposed by virtue of any delegation of legislative or fiscal power by Parliament, the Central Government or the RBI,” NPCI said.

In a 100-page affidavit, NPCI said that as a system provider, it has the right to determine the MDR applicable to transactions processed through the payment system it operates, in accordance with the Reserve Bank of India’s regulatory framework and the prohibition under Section 10A of the Payment and Settlement Systems Act, 2007, which exempts UPI transactions from any charges of less than ₹2.

The NPCI narrated that the government’s drive to meet the cost of zero MDR in 2021-22 through incentive schemes has put a huge financial strain on the exchequer.

“Regardless of the incentives and given the widespread use and adoption of UPI since its inception, the industry has continued to incur significant costs to run the UPI ecosystem, including IT infrastructure, cyber security and risk management, operations, acceptance infrastructure, customer and merchant registration, customer service, marketing and promotion, and customer and merchant liability,” NPCI said in an affidavit.

The NCPI noted that even the Standing Committee on Finance (18th Lok Sabha) in its Thirty-Second Report on “Requirements for Grants (2026–27)” of the Ministry of Finance (Financial Services Department) stated that the budget allocation of ₹2,000 crore for 2026–27 only stipulated a 1% DR cost, meant to offset actual industry costs and 14% potential MDR collections.

The committee recommended “a self-contained, tiered revenue model to ensure long-term financial sustainability of the ecosystem”.

The UPI Steering Committee, which includes third-party application providers including PhonePe, One97 Communications Limited, Google Pay and CRED, has endorsed the MDR framework, NCPI said.

Published – 05 Nov 2026 19:47 IST