The National Payments Corporation of India has clarified to the Supreme Court that merchants are strictly forbidden from passing UPI processing fees to consumers. The new framework, effective since October 15, 2026, applies charges only to specific high-value transactions. This move aims to ensure the long-term sustainability of the payment network, while keeping 96% of daily transactions free for users.
The National Payments Corporation of India (NPCI) has filed an affidavit in the Supreme Court, officially stating that merchants are not allowed to pass the costs of the new Merchant Discount Rate (MDR) framework onto consumers. This clarification addresses growing concerns about whether the introduction of fees for certain UPI payments would lead to hidden costs for everyday users. The NPCI emphasized that its agreements with payment providers and banks include strict terms to prevent this practice, and any merchant attempting to offload these fees could face penalties, including the loss of access to the UPI payment system.
The regulatory framework, which came into effect on October 15, 2026, applies a fee of up to 0.4% on person-to-merchant (P2M) transactions exceeding ₹2,000. According to data provided by the NPCI, this threshold is designed to target only 4% of total merchant transactions. Consequently, the vast majority of UPI usage—approximately 96% of transactions—remains completely free for both the payer and the receiver. Additionally, small merchants with annual inward credits of up to ₹1 lakh are exempt from these charges, as are all person-to-person transfers.
From an investor and industry perspective, the shift from a long-standing zero-fee model to a paid framework is a strategic move to address the costs of running the payment ecosystem. The NPCI has argued that maintaining the network—which involves heavy investment in fraud prevention, cybersecurity, and server capacity—requires a revenue stream from high-value transactions. For the broader digital payments sector, this framework is intended to create a sustainable business model rather than relying solely on subsidies. However, the move has faced legal challenges, with the Supreme Court currently reviewing petitions that question the legal basis of these charges.
The key risk for investors lies in the operational difficulty of enforcing this 'no-pass-through' rule. While the NPCI has formally prohibited the practice, there remains uncertainty about whether merchants might attempt to indirectly recover these costs by slightly increasing the prices of goods or services. Furthermore, any friction caused by the implementation of these fees could potentially impact the growth rate of digital payments if users perceive them as a burden. The market will be watching the Supreme Court’s response to the current legal challenges, as the final verdict will set a precedent for how digital transaction costs are distributed across the economy.
Investors and market participants should continue to track future Supreme Court hearings for clarity on the legality of the framework. Additionally, monitoring the adoption rates and transaction volumes in the coming quarters will be essential to see if the new fee structure affects consumer behavior or merchant participation in the UPI network.