On Wednesday, a public interest litigation has been filed before the Supreme Court challenging the Union government’s new Merchant Discount Rate (MDR) framework for Unified Payments Interface (UPI) transactions, questioning the constitutional validity of the amended Section 10A of the Payment and Settlement Systems Act, 2007, and the manner in which the new charges have been introduced.
The petition, reviewed by ETLegalWorld, has been filed by advocate Anjan Datta. It challenges the Centre’s September 14, 2026 notification withdrawing the no-charge protection for certain UPI transactions, as well as the MDR framework announced by the Ministry of Finance on September 15, 2026. The new framework is set to come into effect on October 15, 2026.
The petitioner has sought, among other reliefs, a declaration that the amended Section 10A is unconstitutional and void, besides quashing the September 14 notification and the MDR framework announced on September 15.
Under the new framework, UPI Person-to-Merchant (P2M) transactions above INR 2,000 will attract an MDR of 0.4 percent, subject to a cap of INR 300 for transactions of INR 75,000 and above. Specified essential and thin-margin sectors will attract a flat INR 5 MDR on transactions above INR 2,000, while capital-market transactions will attract an MDR of 0.02 percent, capped at INR 300.
The framework also retains zero-MDR treatment for Person-to-Person transactions and exempts small merchants receiving up to INR 1 lakh per month through UPI QR codes. Banks have been directed to ensure that merchants do not pass the MDR on to customers, while UPI application providers have been barred from levying platform fees or hidden charges.
The petition challenges the framework on the ground that the amended Section 10A does not provide adequate legislative standards governing the selection of payment modes, transaction-value thresholds, merchant classifications or withdrawal of no-charge protection.
According to the petition, the amendment shifted the statutory framework from an automatic protection linked to specified payment modes to a notification-based regime under which the Central Government can specify electronic payment modes entitled to no-charge protection. The petitioner contends that the amended provision leaves the content and reach of the protection to executive discretion.
The petition questions whether the fixation of MDR rates, thresholds, caps, exemptions and its distribution by an NPCI-led committee amounts to excessive or impermissible sub-delegation, given the absence of clear legislative policy, statutory standards and effective oversight by the Central Government and the RBI.
The petitioner has also challenged the manner in which the rates were brought into effect. It contends that the September 14 Gazette notification only withdrew statutory no-charge protection for UPI transactions above INR 2,000 and did not itself prescribe an MDR rate. The rates and classifications were subsequently announced through the Ministry of Finance’s September 15 press release following deliberations of the UPI Steering Committee.
The petition argues that the MDR framework was therefore introduced without publication of a corresponding statutory instrument prescribing the specific rates, caps and sectoral classifications. It contends that a nationwide financial burden cannot be imposed merely through a press release.
The petitioner has further questioned the classification of transactions and merchants under the framework, particularly the INR 2,000 transaction threshold, INR 1 lakh monthly P2PM threshold and INR 75,000 cap.
The petition argues that the framework creates “cliff-edge” distinctions, including between transactions of INR 2,000 and INR 2,001, and contends that the thresholds and sectoral classifications lack a disclosed empirical basis or determining principles.
On the government’s direction that MDR should not be passed on to consumers, the petitioner argues that a prohibition on direct pass-through does not necessarily eliminate the economic burden on merchants.
The petition states that “an operating cost cannot be erased by declaring that it shall not be passed on,” and argues that merchants could respond by revising prices generally, withdrawing discounts, refusing UPI payments, imposing minimum ticket sizes or seeking split payments.
Another issue raised is the constitutional status of the amended Section 10A. The petitioner contends that the provision was introduced through the procedure applicable to a Money Bill under Articles 109 and 110, despite dealing with the regulatory framework governing charges between banks, payment-system providers and merchants.
The petition relies on the government’s own September 15 position that MDR is “neither a tax nor a charge collected by the Government or NPCI” and is instead “distributed among payment ecosystem participants, including banks and payment application providers”. On that basis, the petitioner argues that the amendment does not fall within the matters specified under Article 110.
The PIL seeks disclosure of the complete regulatory record behind the framework, including the authenticated notification or circular, constitution of the committee, its agenda and minutes, cost study, impact assessment, stakeholder inputs, rate methodology, distribution formula, RBI approval and enforcement safeguards.
The petitioner has alternatively sought reconsideration of the framework through a transparent process involving public consultation and merchant and consumer representation, publication of empirical data and reasons, protection for micro and small enterprises, independent audit, periodic review and a sunset clause.
