Could UPI payments become chargeable? Here's what the new Bill says

The proposed Bill doesn't impose MDR yet, but it gives the Centre the power to decide which digital payments remain free

The Centre has proposed a key legal amendment that could allow Merchant Discount Rate (MDR) to be levied on certain UPI and RuPay debit card transactions in future, particularly those involving large merchants.

However, the proposed law does not impose any charge immediately.

Instead, it gives the central government greater flexibility to decide, through future notifications, which electronic payment modes will continue to remain free of charges. 

The proposal is part of the Taxation and Other Laws (Amendment) Bill, 2026 (Bill No. 150 of 2026), introduced in the Lok Sabha. The Bill seeks to amend Section 10A of the Payment and Settlement Systems Act, 2007 by removing the current legal reference to payment modes listed under Section 269SU of the Income-tax Act and replacing it with a provision allowing the government to notify eligible payment modes separately.

 

If passed, the amendment would create the legal framework for future policy changes without automatically making UPI transactions chargeable. 

What is changing in the law?

At present, Section 10A of the Payment and Settlement Systems Act prevents banks and payment system providers from imposing any charge, directly or indirectly, on payments made using electronic payment modes prescribed under Section 269SU of the Income-tax Act. These include:

• BHIM-UPI
• UPI QR code
• RuPay debit cards

The amendment proposes replacing this fixed reference with the words:

"One or more electronic modes of payment as the central government may, by notification, specify."

In practical terms, this means the list of payment modes that enjoy statutory protection from charges would no longer be permanently written into the law. Instead, the government could decide through notifications which payment methods remain exempt.

Does this mean UPI users will start paying charges?

Not immediately.

The Bill itself does not introduce MDR on UPI or RuPay debit card transactions. It only changes the legal framework.

Any decision to levy MDR on specific transactions would require a separate notification by the central government after the law comes into force. Until such a notification is issued, there is no change for consumers or merchants.

This distinction is important because reports suggesting that UPI has already become chargeable are inaccurate. The Bill merely removes the legal restriction that currently prevents such a move in the future.

Why is the government considering this change?

The debate over MDR has intensified as India's digital payments ecosystem has expanded rapidly.

Since January 2020, the government has prohibited MDR on UPI and RuPay debit card transactions to encourage digital payments. To compensate payment service providers, it introduced an incentive scheme that reimburses banks and payment companies for low-value merchant transactions. However, the scheme largely covers payments of up to Rs 2,000 made to small merchants, while larger merchants are outside its scope.

Industry participants have long argued that maintaining payment infrastructure, fraud prevention systems and settlement networks involves significant costs, but there is no sustainable revenue model because MDR is prohibited.

The Parliamentary Standing Committee on Finance, in its report presented earlier this year, observed that the absence of MDR had made the UPI ecosystem financially unsustainable and noted that government incentives covered only a fraction of the industry's actual costs.

Could large merchants be affected first?

The proposed amendment has led to expectations that any future MDR, if introduced, may initially apply only to businesses with annual turnover exceeding Rs 50 crore.

This is because businesses crossing that turnover threshold are already covered under Section 269SU of the Income-tax framework relating to prescribed digital payment acceptance. Large e-commerce platforms and organised retailers could therefore be among the first categories affected if the government decides to issue such a notification.

However, the Bill itself does not mention Amazon, Flipkart, turnover thresholds or MDR rates. Those details would have to be specified separately through a government notification or subsequent policy decisions.

Will customers have to pay?

Traditionally, MDR is charged to merchants rather than customers. Banks collect the fee from merchants for processing digital transactions and settling payments.

Whether merchants ultimately absorb the cost or pass some of it on through pricing strategies would depend on commercial decisions and any regulatory conditions that may accompany future notifications.

For now, there is no proposal in the Bill requiring consumers to pay a fee for making UPI payments.

What else does the Bill contain?

Besides the payment-related amendment, the Bill proposes several tax changes, including:

• Changes to tax incentives for electronics manufacturing.
• New tax exemptions relating to certain foreign investments in government securities.
• Tax provisions concerning foreign fund managers.
• Incentives for rough diamond trading.
• Amendments relating to data centres.
• Changes to surcharge provisions under the Finance Act, 2026.
• Replacement of the earlier Income-tax (Amendment) Ordinance, 2026 with legislation.

What should UPI users know now?

For consumers, there is no immediate impact.

UPI transactions continue to remain free under the existing framework. The proposed amendment only enables the government to decide, through future notifications, which electronic payment modes will continue to enjoy statutory protection from charges.

If Parliament passes the Bill, any actual change to MDR on UPI or RuPay payments would require a separate notification from the central government. Until then, users can continue making UPI payments as they do today.