# UPI MDR Deferred Until After Diwali: The 0.4% Merchant Charge, Who Pays and the Supreme Court Case

By Shivam Singh, Founder & Mentor, Minimalist IAS · Published 26 Sept 2026 · Updated 2 Nov 2026
Source: https://www.minimalistias.com/blog/upi-mdr-merchant-charge-subsidy

> NPCI has deferred the 0.4% MDR on UPI payments to merchants above ₹2,000 until after Diwali, so UPI stays free for now. What MDR is, who decides, what stays free, the Supreme Court challenge and the UPSC angle.

**UPI MDR is deferred: the 0.4% Merchant Discount Rate on UPI payments to merchants above ₹2,000, due to start in October 2026, will begin only “immediately post Diwali”, on a date to be notified separately.** Until then UPI stays free of MDR for everyone. The structure is unchanged (0.4%, capped at ₹300 from ₹75,000; paid by the merchant, never the customer), and the postponement is not a cancellation.

> **Why in news:** NPCI’s UPI and Services Steering Committee deferred the MDR on select person-to-merchant (P2M) UPI payments, keeping the festive season in mind, two days before it was due to start. Merchant bodies, fintechs and payment firms had sought more time. The Supreme Court has refused to stay the framework but wants the Centre to explain its legal basis on affidavit.

**Updated (October 2026):** the MDR start date was deferred to after Diwali; the rate, cap and exemptions are unchanged.

## UPI MDR deferral: key facts at a glance

The graphic shows the structure as announced; only its start date has moved.

*Figure: Who pays what on UPI once the MDR starts, now deferred to after Diwali: person-to-person transfers are free at any amount; payments to a merchant up to ₹2,000 carry zero MDR and are over 95% of merchant UPI payments by volume; payments above ₹2,000 carry a 0.4% MDR, capped at ₹300 from ₹75,000; the merchant pays the MDR and the customer pays nothing.*

- **What MDR is:** the fee a merchant pays its bank and payment processors for accepting a digital payment.
- **Who decided:** the UPI and Services Steering Committee, headed by NPCI, which sets the MDR’s operational parameters.
- **Still free:** P2P transfers; merchant payments up to ₹2,000; small merchants receiving up to ₹1 lakh a month on UPI QR (P2PM).
- **Concessional rates:** a flat ₹5 on payments above ₹2,000 for railways, telecom, insurance, fuel and similar categories; 0.02% (capped at ₹300) for capital-market payments.
- **Scale:** about ₹314 lakh crore of UPI payments in FY 2025-26.

## How the UPI MDR works

The deferral makes sense only once three look-alike terms are separated: who pays, who receives and who has been covering the gap.

| Term | What it is | Who pays whom |
| --- | --- | --- |
| MDR | Fee for accepting a digital payment | Merchant pays its bank (the acquirer) |
| Interchange | Share of that fee passed to the customer’s bank (the issuer); in UPI the split is set by NPCI’s committee | Merchant’s bank pays customer’s bank |
| Incentive (subsidy) | Government support that offset the cost of zero-MDR payments, meant as short-term help for early adoption | Government pays banks and apps |

**Analogy:** think of a toll plaza. For years the road was free to every vehicle and the upkeep was paid from other pockets; the MDR is a toll for heavier vehicles only (payments above ₹2,000), paid by the shop, never by the traveller.

- **Zero MDR since January 2020:** the Finance (No. 2) Act, 2019 barred MDR on RuPay debit cards and BHIM-UPI through Section 10A of the Payment and Settlement Systems Act, 2007 and the Income-tax Act, 1961.
- **2026 change in law:** Parliament passed the Taxation and Other Laws (Amendment) Bill in August 2026, reworking Section 10A so that the Centre notifies which payment modes stay charge-free. The Finance Ministry then notified UPI payments up to ₹2,000 (and RuPay debit cards) as zero-charge modes.
- **Why a charge:** rising processing, fraud-control and cybersecurity costs; the MDR stays within the UPI ecosystem to fund resilience, innovation and security.

## The Supreme Court challenge: tax, fee or charge?

The law explains how the charge became possible; the court case asks whether it is legitimate.

- **The petition:** challenges the Finance Ministry’s September notifications and the MDR framework.
- **The Bench:** CJI Surya Kant with Justices Joymalya Bagchi and V. Mohana refused an interim stay and issued notice to the Centre, the RBI and the NPCI, seeking a counter-affidavit within four weeks. We could not confirm any filing yet.
- **The government’s stand:** neither a tax nor a fee but a settlement charge among payment-system players; it takes no money; about 96% of merchant transactions are unaffected.
- **Why the label matters:** a tax needs the authority of law (Article 265); a fee needs a service in return. The label decides the test the charge must meet.

## Issues and way forward

Whatever the court decides, the policy question remains who should fund a public payment network.

- **Economic:** who funds digital public infrastructure: merchants, users or taxpayers.
- **Inclusion:** small merchants and small payments are protected, but larger payments could drift back to cash; traders’ bodies have warned of this.
- **Way forward:** publish UPI’s cost data and how the MDR is shared; monitor merchant refusals after the start; give customers a quick grievance channel.

## Why it matters for UPSC

From charges to the exam: **GS Paper 3 (Economy)** covers digital payments as public infrastructure and resource mobilisation. **GS Paper 2** covers Article 265 and delegated notification powers. **Prelims** tests MDR, P2P vs P2M and the NPCI’s role.

> **Prelims traps**
> **Deferred is not withdrawn:** the rate, cap and exemptions stand.
> **The merchant pays, not the customer:** pass-on as a surcharge is barred.
> **P2P is never charged:** only P2M payments above ₹2,000 attract MDR.
> **Two bodies, two jobs:** the Finance Ministry notifies zero-charge modes under Section 10A; the NPCI-headed committee sets the MDR’s operational parameters.
> **Tax vs fee:** the government calls it neither; Article 265 applies only to taxes.

## Mentor’s note

- **Don’t write that the MDR was withdrawn.** Only the start date moved.
- **Use the legal chain.** Zero MDR (2020) came from Section 10A and the Income-tax Act; the 2026 amendment turned the zero-charge list into a notification, which is the delegated power GS2 asks about.
- **Frame Mains answers by who bears the cost.** Cover users, merchants, banks and government; add inclusion and Article 265.

## 60-second revision

- **Q: What was deferred?** The 0.4% MDR on P2M UPI payments above ₹2,000, to after Diwali.
- **Q: Who pays the MDR?** The merchant; customers pay nothing.
- **Q: Which payments stay free?** P2P at any amount; merchant payments up to ₹2,000.
- **Q: Which body decides MDR parameters?** NPCI’s UPI and Services Steering Committee.
- **Q: What is the legal question in the Supreme Court?** Whether the MDR is a tax, a fee or a settlement charge.

## Practice: Prelims MCQ

**Consider the following statements:**

1. **The Merchant Discount Rate on UPI applies to person-to-person transfers above ₹2,000.**
2. **The zero-MDR regime for UPI was introduced through an amendment to the Payment and Settlement Systems Act, 2007.**
3. **Merchants may recover the Merchant Discount Rate from customers as a surcharge.**
4. **The Unified Payments Interface is operated by the National Payments Corporation of India.**

How many of the above statements are correct?  
(a) Only one  
(b) Only two  
(c) Only three  
(d) All four

**Answer: (b) Only two**  
**Explanation:**  
**Statement 1 is incorrect:** the MDR applies only to person-to-merchant payments above ₹2,000; P2P transfers stay free.  
**Statement 2 is correct:** the Finance (No. 2) Act, 2019 inserted Section 10A in the Payment and Settlement Systems Act, 2007 for zero MDR from January 2020.  
**Statement 3 is incorrect:** merchants may not pass the MDR on to customers.  
**Statement 4 is correct:** UPI is operated by the NPCI.

**UPSC CSE Prelims 2018:**  
**With reference to digital payments, consider the following statements:**  
**1. BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.**  
**2. While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of authentication.**  
Which of the statements given above is/are correct?  
(a) 1 only  
(b) 2 only  
(c) Both 1 and 2  
(d) Neither 1 nor 2  
**Answer: (a) 1 only.**

**See the detailed explanations:** [Prelims 2018](https://www.minimalistias.com/pyqs/prelims/2018) in the free PYQ vault, with year-wise analysis. Free to browse; free sign-up to download.

## Practice: Mains question

> **Free digital public infrastructure must eventually be paid for by someone. In the light of the deferred Merchant Discount Rate on UPI payments above ₹2,000, examine who should bear the cost of digital payments in India. (Answer in 150 words; 10 Marks)**

## Terms to know

- **MDR:** Merchant Discount Rate, the fee a merchant pays to accept a digital payment
- **P2M / P2PM:** person-to-merchant payments / the small-merchant category (up to ₹1 lakh a month) with zero MDR
- **Interchange:** the share of the MDR passed to the customer’s bank

## Frequently asked questions (FAQs)

### Is there an MDR on UPI now?

No. The 0.4% MDR on UPI payments to merchants above ₹2,000 is deferred until after Diwali, on a date NPCI will notify. UPI carries no MDR at present, and customers pay no charge in any case.

### Will customers pay a charge on UPI when the MDR starts?

No. Merchants pay the 0.4% MDR on payments above ₹2,000, and they cannot pass it on to customers as a surcharge. UPI apps may not levy a platform fee either.

### Which UPI payments remain free?

Person-to-person transfers of any amount and merchant payments up to ₹2,000, over 95% of merchant UPI volume. Small merchants receiving up to ₹1 lakh a month through UPI QR also pay zero MDR.

### What is the Supreme Court case on UPI MDR?

The Court refused a stay but asked the Centre, RBI and NPCI to explain the charge on affidavit. The government says it is a settlement charge, neither tax nor fee. The case continues despite the deferral.

## Related reading

- [RBI Bulletin: why India's economy is called resilient](https://www.minimalistias.com/blog/rbi-bulletin-economic-resilience-west-asia-forex)
- [Practise previous-year Economy questions in the free PYQ vault](https://www.minimalistias.com/pyqs)
- [All Daily UPSC Briefs](https://www.minimalistias.com/resources/daily-brief)

## Sources

- [FAQs on MDR on select UPI (P2M) transactions — Department of Financial Services, September 2026](https://financialservices.gov.in/sites/default/files/2026-09/FAQs---Merchant-Discount-Rate--MDR--on-Select-UPI--P2M--Transactions_0.pdf)
- [UPI MDR deferred until after Diwali — Business Standard, October 2026](https://www.business-standard.com/finance/news/upi-mdr-deferred-until-after-diwali-new-date-to-be-notified-npci-126101300556_1.html)
- [Supreme Court asks Centre to explain UPI charges, refuses stay — LiveLaw, September 2026](https://www.livelaw.in/top-stories/supreme-court-asks-centre-to-explain-decision-to-levy-charges-on-upi-transactions-refuses-stay-552055)
- [Parliament passes Taxation Laws Amendment Bill — LiveLaw, August 2026](https://www.livelaw.in/amp/news-updates/parliament-passes-taxation-laws-amendment-bill-paving-way-for-possible-upi-charges-545218)

From [The Daily UPSC Brief](https://www.minimalistias.com/resources/daily-brief), 26 September 2026; rewritten with the 14 October 2026 brief — by Shivam Singh.

---
Minimalist IAS — free UPSC study material and one-to-one mentorship. Canonical page: https://www.minimalistias.com/blog/upi-mdr-merchant-charge-subsidy