About the Author
Pranav C Satheesh is an advocate enrolled with the Bar Council of Kerala and a graduate of Government Law College, Kozhikode, specializing in real estate law.
Background
For over six years, Section 10A of the Payment and Settlement Systems Act, 2007 barred banks and payment providers from charging any fee on UPI transactions.[1] That protection, introduced through the Finance (No. 2) Act, 2019 alongside Section 269SU of the Income-tax Act, treated UPI as a public good rather than a commercial service.[2] The policy helped push monthly UPI volumes past twenty-four billion transactions, but it also left acquiring banks and fintech companies absorbing an estimated ten to twelve thousand crore rupees in annual losses, against a government subsidy of roughly two thousand crore rupees a year.[3]
In August 2026, Parliament passed the Taxation and Other Laws (Amendment) Act, 2026, which rewrote Section 10A.[4] Rather than a blanket ban, the amended provision lets the central government notify which payment modes and transaction values remain fee-free. The Ministry of Finance and the NPCI acted on this power in September 2026, introducing a tiered Merchant Discount Rate: transactions above two thousand rupees now attract a 0.4 percent charge, capped at three hundred rupees, with reduced rates for capital market transfers and a flat five-rupee fee for sectors such as railways and utilities.[5] Peer-to-peer transfers and micro-merchants earning under one lakh rupees a month remain exempt.[6]
This shift from an absolute statutory ban to executive discretion has drawn a Public Interest Litigation before the Supreme Court, raising three principal constitutional questions.[7]
The Money Bill Question
The 2026 amendment was passed as a Money Bill under Articles 109 and 110, which meant the Rajya Sabha could not vote on it.[8] Article 110(1) confines a Money Bill to matters dealing exclusively with taxation, government borrowing, or the Consolidated Fund of India.[9] Whether a statute touching commercial payment charges fits that description is now central to the case.
The Supreme Court’s own precedent is unsettled here. In the Aadhaar judgment, the majority accepted the Money Bill route because the legislation centered on subsidy delivery from the Consolidated Fund.[10] But in Rojer Mathew v. South Indian Bank Ltd., a coordinate bench doubted that reasoning and referred the question to a seven-judge bench, which remains pending.[11] The petitioners argue the point is stronger here than in Aadhaar: the government has itself stated, in its own September 15 press release, that the new MDR is neither a tax nor a government levy but a fee shared among private banks and payment companies.[12] If that is accurate, the amendment arguably falls outside Article 110 altogether, since none of the disputed revenue touches the Consolidated Fund.
Manifest Arbitrariness Under Article 14
The petitioners also invoke the doctrine of manifest arbitrariness, established in Shayara Bano v. Union of India, which allows courts to strike down legislation or executive action that is capricious or lacks a rational basis, even without a specific constitutional violation.[13] State of A.P. v. McDowell & Co. had earlier resisted this idea, but Shayara Bano overtook that position.[14]
The argument here centers on the sharp cutoffs built into the new framework. A transaction of two thousand rupees is free; one rupee more triggers a 0.4 percent charge. A micro-merchant under the one lakh rupee monthly threshold is exempt; cross it for three months running and the exemption disappears entirely, regardless of margins.[15] Neither the government notification nor the NPCI framework has published a cost study or empirical basis explaining why these particular figures, rather than any other, were chosen.[16] The petitioners also point to the differential treatment of UPI against RuPay debit cards, which remain fully exempt despite serving an overlapping set of merchants and consumers.[17]
Excessive Delegation
A third strand concerns how the rates were actually set. Administrative law, going back to In re Delhi Laws Act and Hamdard Dawakhana v. Union of India, holds that a legislature may delegate rule-making but cannot hand over its essential function of setting policy.[18] The amended Section 10A tells the government which modes to notify but supplies no formula, criteria, or guiding principle for how thresholds should be drawn.[19]
More significantly, the rates were not fixed by the Payments Regulatory Board, the statutory body created under Section 3 of the PSS Act for exactly this purpose.[20] Instead, they came from the UPI and Services Steering Committee, a twenty-two-member body under the NPCI made up largely of bankers and fintech representatives, with no worker or vendor group included.[21] The petitioners argue that setting a compulsory financial burden through such a body, without the public consultation and cost disclosure expected of utility regulation, amounts to an unconstitutional handover of legislative authority.[22]
Broader Implications
Beyond the constitutional questions, the ban on passing MDR costs to consumers is likely to be absorbed elsewhere: through higher retail prices, minimum ticket sizes for UPI payments, or bill splitting to stay under the two thousand rupee threshold.[23] For India’s informal workforce, whose UPI adoption depended heavily on the service being free, the change also raises the prospect of new visibility to tax authorities and lenders without corresponding protections such as pensions or minimum earnings.[24]
Conclusion
The 2026 UPI tariff overhaul may be a defensible economic response to a genuine funding gap, but the manner of its introduction leaves it exposed on several fronts: a Money Bill classification that sits uneasily with a pending seven-judge reference, thresholds set without disclosed data, and rate-making handed to a body outside the statutory regulatory structure. How the Supreme Court resolves these questions will likely shape not just UPI pricing but the limits of using the Money Bill route and informal steering committees for economic regulation more broadly.
[1]Payment and Settlement Systems Act, No. 51 of 2007, § 10A, India Code (2007).
[2]Income-tax Act, No. 43 of 1961, § 269SU, India Code (1961).
[3]UPI Zero MDR Policy Explained: Who Pays for Free Digital Payments?, SuperKalam, https://superkalam.com/current-affairs/articles/upi-zero-mdr-policy-explained-who-pays-for-free-digital-payments; Why the 2026 Bill May Force a Rethink on Free UPI, SuperKalam, https://superkalam.com/current-affairs/articles/why-the-2026-bill-may-force-a-rethink-on-free-upi-upsc-notes.
[4]Taxation and Other Laws (Amendment) Act, 2026, India Code (2026).
[5]New UPI Charges: Understanding the Impact on Digital Payments, Rediff (Sept. 16, 2026), https://m.rediff.com/business/report/upi-fee-government-puts-price-on-big-merchant-payments/20260916.htm; MDR Charges Explained: Who Will Pay How Much for UPI?, Times of India (2026), https://timesofindia.indiatimes.com/toi-blogs/money-matters/mdr-charges-explained-who-will-pay-how-much-for-upi/articleshow/134301861.cms; UPI Charges from 15 October 2026: 0.4% MDR Explained, CA Jatin Karda, https://cajatinkarda.in/articles/upi-mdr-charges-october-2026.
[6]CA Jatin Karda, supra note 5.
[7]PIL in SC Challenges New MDR on UPI Transactions Above INR 2000, Econ. Times Legal (2026), https://legal.economictimes.indiatimes.com/news/litigation/pil-in-sc-challenges-new-mdr-on-upi-transactions-above-inr-2000/134288628; PIL in SC Against UPI Charges for Commercial Transactions Above Rs. 2,000, ANI News (Sept. 16, 2026), https://www.aninews.in/news/national/general-news/pil-in-sc-against-upi-charges-for-commercial-transactions-above-rs-200020260916205727; Trouble for Modi Government: PIL in Supreme Court Challenges Charges on UPI Payments Above Rs. 2,000, India.com, https://www.india.com/news/india/trouble-for-modi-government-pil-supreme-court-challenges-charges-on-upi-payments-above-rs-2000-8525886/.
[8]India Const. art. 109; id. art. 110.
[9]India Const. art. 110.
[10]Justice K.S. Puttaswamy (Retd.) v. Union of India, (2019) 1 S.C.C. 1 (India).
[11]Rojer Mathew v. South Indian Bank Ltd., (2020) 6 S.C.C. 1 (India).
[12]Rediff, supra note 5; CA Jatin Karda, supra note 5.
[13]Shayara Bano v. Union of India, (2017) 9 S.C.C. 1 (India); India Const. art. 14.
[14]Shayara Bano, supra note 13; State of A.P. v. McDowell & Co., (1996) 3 S.C.C. 709 (India).
[15]CA Jatin Karda, supra note 5.
[16]Econ. Times Legal, supra note 7; ANI News, supra note 7.
[17]Times of India, supra note 5; CA Jatin Karda, supra note 5.
[18]In re The Delhi Laws Act, 1912, 1951 S.C.R. 747 (India); Hamdard Dawakhana v. Union of India, A.I.R. 1960 S.C. 554 (India).
[19]Payment and Settlement Systems Act, § 10A, supra note 1.
[20]Payment and Settlement Systems Act, § 3, supra note 1.
[21]CA Jatin Karda, supra note 5; ANI News, supra note 7.
[22]Econ. Times Legal, supra note 7.
[23]SuperKalam, supra note 3.
[24]UPI Has Made Informal Workers More Visible, But Not More Secure, Indian Express (Sept. 2026), https://indianexpress.com/article/opinion/columns/upi-has-made-informal-workers-more-visible-but-not-more-secure-10881757/.
