New Delhi: As part of Parliament’s ongoing session, Union finance minister Nirmala Sitharaman Tuesday introduced the Taxation and Other Laws (Amendment) Bill, 2026, in the Lok Sabha, which seeks to bring changes to the existing law on payments and settlement systems, particularly unified payments interface transactions, also known as UPI transactions.
UPI is an instant payment system developed by the National Payments Corporation of India (NPCI), which allows inclusion of multiple bank accounts into a single mobile application, merging several banking features and providing seamless merchant payment.
The bill seeks to tweak a host of statutes like the Income Tax Act, 2025, Finance Act, 2026, and the Payment and Settlement Systems Act, 2007.
Significantly, once passed, the bill could lead to the imposition of a merchant discount rate (MDR) on UPI transactions, which is a fee businesses pay to banks and payment processors to accept card and digital payments. Usually, this fee ranges from 1-3% per transaction.
One of the major laws the bill seeks to modify is the Payment and Settlement Systems Act, 2007, which allows the Reserve Bank of India to oversee and control all money transfer and payment methods like UPI or the National Electronic Funds Transfer (NEFT).
A significant shift could occur as a result of the scrapping of Section 10A of the 2007 Act, which prevents banks and payment system providers (PSPs) from imposing any fee on transactions carried out through certain electronic payment methods.
Section 10A was added to the 2007 statute in November 2019, and states that no bank or system provider shall impose, either directly or indirectly, any charge upon a person making or receiving a payment by using the prescribed electronic modes of payment.
Experts, however, say the user will not have to bear any extra fees; rather merchants or businesses may have to.
Advocate Binit Agarwal, a UNDP-empanelled expert on law and AI, told ThePrint that passage of the bill would empower the government to exclude or include certain kinds of electronic modes of payments from the list of electronic modes of payments on which no charges can be imposed, without having to resort to legislative changes.
On what it means for the lay person, Agarwal said: “It appears to be a storm in a teacup. Substantively, nothing has changed on allowing UPI service providers to charge MDR on transactions. The policy power always was with the government and continues to remain so”.
If the law is passed, it will become easier for the Centre to pick and choose the electronic modes of payments on which it wants to allow charges to be imposed, he explained.
“This legislative change in itself does not make clear what shape or form a transaction fee on UPI could take. Doing so today would be reading much into this amendment,” Agarwal added.
Pointing out how the fintech industry and UPI ecosystem participants have long demanded monetisation of UPI transactions, the lawyer said it remains unclear from this amendment if the Centre will monetise UPI transactions completely.
“For the common person, today, nothing has changed in what they pay for UPI transactions, nor is it clear if that could happen soon,” Agarwal told ThePrint.
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‘Bill doesn’t fully address issue’
According to legal experts, the proposed amendment should not be read as an immediate policy to levy charges on UPI transactions, but as a framework giving the Centre greater flexibility over the future regulation of digital payment modes.
Amar Jain, Partner at Zen Access Law Associates, said the amendment changes the legal architecture governing the zero-charge regime rather than imposing merchant charges by itself.
“This bill amends Section 10A of the Payment and Settlement Systems Act. Under the current law, banks and payment system providers cannot charge any fee on transactions made through the prescribed digital payment modes that large businesses, those with turnover above Rs 50 crore, are required to offer their customers under the Income-Tax Act. At present, these include RuPay debit cards and BHIM-UPI and UPI QR code-based payments as prescribed by the government,” Jain said.
He explained that the bill empowers the central government to independently notify the digital payment modes that will qualify for the zero-charge regime under the 2007 Act.
According to Jain, the amendment shifts the legal basis for zero-MDR protection. “Instead of automatically applying to the payment modes prescribed under the Income-tax Act, the protection will now depend on a separate notification issued by the central government under the amended Section 10A. The government may choose to notify the same payment modes, or a different set of modes, under the new framework,” he added.
Offering a policy perspective, Supreme Court advocate Deeksha Gupta said the amendment itself does not authorise charges on UPI transactions.
“The proposed amendment to the Payment and Settlement Systems Act delinks Section 10A from the Income-tax Act. Section 10A was introduced in 2019 as part of the government’s push to promote digital payments by ensuring that no charges were levied on transactions made through the prescribed electronic payment modes, including those notified for UPI and RuPay debit cards,” Gupta said.
While banks and payment system providers incur substantial costs in maintaining payment infrastructure, cybersecurity and technology, the amendment “does not itself impose any charges on UPI or other digital payment transactions”, she added.
“As a matter of policy, the government could choose to retain the zero-charge framework for small merchants while permitting merchant discount rates for larger businesses that are better placed to absorb such costs,” Gupta said.
However, she cautioned that the bill stops short of creating a differentiated framework for merchants.
“In my opinion, the bill does not fully address the issue. While it gives the government the power to determine which payment modes remain covered by the zero-charge regime, it does not provide any statutory distinction between small and large merchants. If the government intends to adopt a differentiated approach in the future, such classification should be based on clear and objective criteria to avoid uncertainty and inconsistent implementation,” she said.
Gupta added that any future framework should ensure that small shopkeepers and street vendors, who have been among the biggest beneficiaries of UPI, are not burdened.
Why the changes
Since January 2020, the Centre maintained a zero-MDR regime for BHIM-UPI and RuPay debit card merchant transactions to promote digital payments and ensure that financial services are accessible to more people. However, the Department of Financial Services (DFS), in its written submission to the Parliamentary Standing Committee on Finance, stated that “the absence of MDR makes the UPI ecosystem financially unsustainable”.
Apart from this, the department stated that governmental support helps ease only 11% of the industry’s actual costs.
The Centre’s stance is that, since mandating zero MDR on UPI merchant transactions in 2020, it has partly compensated banks and payment service providers through an incentive scheme.
In March 2023, NPCI introduced an interchange fee framework for merchant transactions made using prepaid payment instruments (PPIs), such as wallets, over UPI. From 1 April 2023, eligible merchant transactions above Rs 2,000 became subject to an interchange fee of up to 1.1%, payable within the payment ecosystem rather than by customers.
According to data gathered by the NPCI, which was incorporated in 2008 as an umbrella organisation for operating retail payments and settlement systems in India, more than 20 billion transactions are processed every month for free, for both customers and merchants.
While proposing the new law Tuesday, the government noted that in the past few months, on account of evolving geopolitical developments and related disruptions in international trade and supply chains, the global economic landscape has undergone considerable uncertainty.
Underlining the need to carry out certain immediate taxation measures to mitigate the impact of external economic shocks, ensure stability in the domestic economy, and support key sectors affected by the prevailing global conditions, the bill states that amendments are needed on an urgent basis, in larger public interest.
Ordinance preceding bill
The bill points out that since Parliament was not in session and circumstances existed which made it necessary to take immediate action, the President—while acting under Article 123 of the Constitution which gives the President power to make temporary laws called ordinances when both Houses are not in session—promulgated the Income-tax (Amendment) Ordinance, 2026, on 5 June this year.
Introduced with the purpose of mitigating the impact of external economic shocks, ensuring stability in the domestic economy and supporting key sectors affected by the prevailing global conditions by amending the law, the bill states there is a need for a timely and coherent response, given the global developments.
Although the reasons due to which the ordinance was passed remain relevant, the bill adds that additional taxation measures are necessary to comprehensively achieve the same objective. This is why the amendments are being proposed now.
“Further, in order to provide ease of doing business and tax certainty… few other amendments are also proposed,” states the bill, a copy of which has been accessed by ThePrint.
(Edited by Nida Fatima Siddiqui)
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