NPCI says MDR charge has been imposed to save the UPI ecosystem from turning ouroboric

National Payments Corporation of India (NCPI) has said in the Supreme Court that “zero Merchant Discount Rate (MDR)” for all Unified Payments Interface (UPI) transactions was no longer sustainable, as functional costs for the phenomenally expanding digital payment industry in India would burn into the public exchequer.

UPI processed as many as 24.51 billion transactions, cumulatively worth approximately ₹29.82 lakh crore, in the month of August 2026 alone, marking its highest-ever monthly volume. An average of approximately 791 million transactions were processed every single day in that month. In Financial Year 2025-26, UPI processed approximately 241.62 billion transactions worth approximately ₹314 lakh crore, the NPCI said.

“The figures illustrate not merely growth, but growth of a magnitude that places correspondingly greater demands on the security, resilience, and infrastructural capacity of the system,” the NPCI, represented by Additional Solicitor General N. Venkataraman, submitted in Court.

The Corporation was responding to a challenge in Court to the government’s decision to introduce an MDR of 0.4% on Person-to-Merchant (P2M) UPI transactions above ₹2,000.

Person to person (P2P) transactions, which account for 70% of total UPI transaction value, would remain completely free irrespective of amount, the NCPI said. There would be no transaction or platform fee or other charge permissible for individuals for sending or receiving money through UPI, it added.

It said person-to-merchant (P2M) payments up to ₹2,000 would also remain “entirely free of MDR”. “This threshold is calibrated to shield the overwhelming majority of everyday, low-value merchant payments of the kind made by ordinary consumers and small merchants alike,” the NPCI said.

The affidavit assured that the amended MDR framework targeted only higher value commerce without disturbing low-value transactions that drive the mass adoption of UPI.

The MDR charge, which did not exceed 0.4%, would apply to P2M transactions above ₹2000. “Effectively, MDR will apply to only about 4% of merchant transactions, and approximately 96% of all P2M will remain unaffected,” the NPCI said.

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

The NCPI argued that MDR was not a tax, cess, fee, duty or any other statutory levy imposed by or under a legislative enactment. It was plainly a ‘charge’ collected to recover the huge costs associated with the functioning of the payment system, and was in turn, distributed entirely amongst the participants in the UPI ecosystem.

“MDR is a charge collected by the system participants to recover the costs incurred in running the payment system, and not an imposition pursuant to any delegation of legislative or fiscal power by Parliament, the Central Government or RBI,” the NPCI submitted.

In a 100-page affidavit, the NPCI said that, as a system provider, it had the liberty to determine the MDR applicable to transactions processed through the payment system operated by it, subject to the regulatory framework of the Reserve Bank of India and the prohibition under Section 10A of the Payment and Settlement Systems Act, 2007, which exempts UPI transactions below ₹2000 from any charges.

The NPCI related how the government’s efforts to cover the costs of zero MDR from 2021-2022 through incentive schemes had been a huge financial strain on the public exchequer.

“Notwithstanding the incentive and given the widespread usage and adoption of UPI since its inception, the industry continued to incur substantial costs in operating the UPI ecosystem, including costs towards IT infrastructure, cyber security and risk management, operations, acceptance infrastructure, customer and merchant onboarding, customer service, marketing and promotion, and customer and merchant liability,” the NPCI affidavit said.

The NCPI noted that even the Standing Committee on Finance (18th Lok Sabha), in its Thirty-Second Report on ‘Demands for Grants (2026-27)’ of the Ministry of Finance (Department of Financial Services) had noted that a ₹2,000 crore budgetary allocation for 2026-27, intended to offset the costs of the zero-MDR regime, covered merely 11 % of the industry’s actual costs and 14% of potential MDR collections.

The committee had recommended a “self-reliant, tiered revenue model to secure the ecosystem’s long-term financial sustainability”.

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