Payments Act amendment may be a precursor to MDR on UPI payments

Proposed amendment shifts the power to notify fee-protected payment modes to the Centre, a move industry sources see as an early step towards a possible UPI MDR

The Taxation and Other Laws (Amendment) Bill, 2026 listed for Parliament on Tuesday could empower the Centre to decide which digital payments methods will remain free of charges and which ones will incur charges. 

This could replace the list drawn from the Income-tax Act, potentially paving the way for a merchant discount rate (MDR) on unified payments interface (UPI), said sources. The Bill does not specify fees, rates or a timeline for any payment instrument, and the prohibition on charging any fees for instruments like UPI stays. 

“While this will undoubtedly lead to a debate, it is important to remember that both Brazil’s Pix and China’s real-time payment systems have always had merchant charges of 30-40 bps (basis points)... Looking at the near-zero investment scenario over the last six years, the pace of growth is naturally slowing, even though there is still an opportunity to increase penetration by almost 3x across both consumers and merchants,” Amrish Rau, CEO, Pine Labs, said in a post on X. 

On Monday, fintech stocks closed higher ahead of the Bill’s introduction. 

Pine Labs rose 9.68 per cent to ₹152.45 a share, Paytm saw a 2.63 per cent rise to ₹1,376 a share. AvenuesAI rose 11.02 per cent to ₹17.63 a share, whereas MobiKwik saw its stock rise 4.66 per cent to ₹214.55 per share. 

A potential MDR on UPI could also bring relief to fintechs such as PhonePe and Razorpay that are in the process of initial public offerings (IPOs). 

According to the Bill, what changes is where the list of protected payment modes comes from — instead of the Income-tax Act, the Centre will notify the list without returning to the Parliament. 

Sources in the industry believe that this amendment to the Payments And Settlement Systems Act, 2007, is likely to be a precursor to a potential MDR for large merchants. 

“In the Payment and Settlement Systems Act, 2007, in section 10A, for the words, figures and letters ‘the electronic modes of payment prescribed under section 269SU of the Income-tax Act, 1961’, the words ‘one or more electronic modes of payment as the Central government may, by notification, specify’ shall be substituted with effect from the date of publication of this Act in the Official Gazette,” the bill states, a copy of which has been reviewed by Business Standard. 

Two provisions have kept UPI free over the past few years. 

Section 269SU of the Income-tax Act tells businesses with turnover above ₹50 crore that they must accept payment through prescribed electronic modes — specified by the Central Board of Direct Taxes (CBDT) in December 2019 as UPI, UPI QR and RuPay debit cards. 

Section 10A of the Payment and Settlement Systems (PSS) Act tells banks and systems that they may not charge the payer or the recipient on those same modes. It takes the modes from the aforementioned tax provision.  With the proposed amendment, Section 10A will no longer point at the tax provision and will instead cover whichever modes the Central government specifies by notification. A future notification could leave out certain categories such as peer-to-merchant (P2M) UPI payments at large merchants, for instance, making a charge possible on them. 

“After this amendment, it is expected that the Finance Ministry would have the power to introduce MDR structures like the one for large merchants instead of returning to Parliament. This is the first step towards a potential MDR on UPI. For now, no decision has been made on what kind of MDR that should be levied because the Ministry did not have the powers until now,” said a source with knowledge of the matter. 

Currently, UPI and RuPay debit card transactions do not incur any charges. 

Over the past few years, the digital payments industry such as the Payments Council of India (PCI) has been requesting the government to introduce a 30 bps MDR on transactions made through UPI and RuPay debit card transactions at large merchants. 

“Zero MDR can continue for smaller merchants on low-value transactions, ensuring protection for the smallest businesses while enabling sustainable monetisation for service providers. We would like to assure the government that introduction of nominal MDR for RuPay Debit cards and UPI (for large merchants) will not result in any operational disruption, even in the short term, as these merchants are already accustomed to MDR on other payment modes,” Vishwas Patel, Chairman, PCI, had written to the Prime Minister’s Office (PMO) in March 2025. 

The government has been subsidising the growth of homegrown payments instruments such as UPI through incentive schemes every year. The Union Budget allocated a ₹2,000 crore incentive to promote low-value, P2M for UPI and RuPay debit cards this year. 

This was 8.9 per cent lower than the final allocation in FY26, which stood at about ₹2,196.21 crore. The Budget Estimate for FY26 was ₹437 crore. According to data, the highest government payout for the incentive was at ₹3,631 crore in FY24.

The industry estimates that operating and expanding the payments system costs at least ₹10,000 crore annually.