RNA polymerase II (Pol II) utilizes the same active site for polymerization and intrinsic cleavage. Pol II proofreads the nascent transcript via its intrinsic nuclease activity to maintain high transcriptional fidelity critical for cell growth and viability. The detailed catalytic mechanism of intrinsic cleavage remains unknown. Here, we combined ab initio quantum mechanics/molecular mechanics studies and biochemical cleavage assays to show that Pol II utilizes downstream phosphate oxygen to activate the attacking nucleophile in hydrolysis, while the newly formed 3′-end is protonated through active-site water without a defined general acid. Experimentally, alteration of downstream phosphate oxygen either by 2′-5′ sugar linkage or stereo-specific thio-substitution of phosphate oxygen drastically reduced cleavage rate. We showed by N7-modification that guanine nucleobase is not directly involved as an acid–base catalyst. Our proposed mechanism provides important insights into the intrinsic transcriptional cleavage reaction, an essential step in transcriptional fidelity control.