The Lok Sabha on Thursday passed the Taxation and Other Laws (Amendment) Bill, 2026, paving the way for the government to potentially allow banks and payment service providers to levy charges on transactions made through Unified Payments Interface (UPI) and other notified electronic payment modes.
The Bill, introduced by Finance Minister Nirmala Sitharaman, was passed by voice vote amid disruptions in the House. Among its key provisions is an amendment to the Payment and Settlement Systems (PSS) Act, 2007, a move that has reignited the long-running debate over the imposition of Merchant Discount Rate (MDR) on digital payments.
What Has Changed?
Currently, Section 10A of the Payment and Settlement Systems Act prohibits banks and system providers from imposing any charge, directly or indirectly, on electronic payment modes prescribed under Section 269SU of the Income-tax Act.
The amendment replaces the existing reference with a broader provision that allows the Central Government to specify, through notification, the electronic payment modes that will fall under the no-charge regime.
The amended provision states:
"One or more electronic modes of payment as the Central Government may, by notification, specify."
This seemingly small legislative change carries significant implications. It effectively removes the blanket statutory protection currently enjoyed by UPI and certain other digital payment modes and gives the government greater flexibility to decide which payment systems can remain free and which may attract charges in the future.
Does This Mean UPI Will Become Chargeable Immediately?
No.
The passage of the Bill does not automatically impose charges on UPI transactions . Any decision to levy MDR or other transaction fees would require a separate government notification after the law comes into force.
For now, UPI transactions continue to remain free for users and merchants, as has been the case since the government's push for digital payments following demonetisation.
However, the amendment creates the legal framework that could enable the government to permit charges on certain digital payment modes in the future.
Why Is MDR Back in the Spotlight?
The debate centres around the Merchant Discount Rate (MDR), a fee paid by merchants to banks and payment service providers for processing digital transactions.
While payment systems such as RTGS and NEFT involve service charges, UPI transactions have largely remained free due to government policy and statutory protection.
Industry stakeholders, including banks, fintech companies, and payment infrastructure providers, have long argued that maintaining and expanding India's world-leading digital payments infrastructure requires substantial investment. Without a sustainable revenue model, many believe the ecosystem may face challenges in funding innovation, security, and operational costs.
RBI Governor: Someone Has to Pay
Speaking on the issue a day before the Bill's passage, RBI Governor Sanjay Malhotra described discussions around MDR as "premature" but acknowledged the economic reality behind digital payments infrastructure.
According to Malhotra, public payment systems require continuous investment and there are essentially two funding models:
- Taxpayer-funded infrastructure, where the government bears the cost.
- A "user pays" model, where merchants or users contribute through MDR or similar charges.
He emphasized that regardless of the model chosen, the costs of operating and upgrading digital payment infrastructure cannot disappear.
What Happens Next?
The amendment is part of the broader Taxation and Other Laws (Amendment) Bill, 2026, which also contains changes relating to the Income-tax Act, 2025 and the Finance Act, 2026.
Once enacted and notified, the government will have the authority to determine which electronic payment modes remain protected from charges and whether any form of MDR can be introduced for specific categories of transactions.
Market observers believe that if MDR is considered in the future, it is more likely to be introduced on high-value merchant transactions rather than person-to-person transfers. However, no formal proposal has been announced so far.
Why This Matters
India's UPI platform has become the backbone of the country's digital economy, processing billions of transactions every month. The zero-cost model has played a major role in driving adoption among consumers, small businesses, and merchants.
The Lok Sabha's approval of the amendment marks the first major legislative shift in the framework governing charges on digital payments. While users will not see any immediate change, the amendment gives policymakers the flexibility to revisit the economics of digital payments as the ecosystem continues to grow.
With banks, fintech firms, merchants, and consumers all closely watching developments, the next step will be whether the government issues notifications that redefine the future of UPI pricing in India.
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