Will UPI Transactions Be Charged? Lok Sabha Passes Key Digital Payments Bill

New Delhi: The Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026, on Thursday, granting the Central Government the legal ability to charge banks and payment service providers for future Unified Payments Interface (UPI) transactions and other notified digital payment channels.  

The Bill was passed by voice vote without debate when the House resumed proceedings at 2 p.m. following an earlier recess. Finance Minister Nirmala Sitharaman introduced the law amid House interruptions. Aside from revising the Payment and Settlement Systems Act of 2007, the Bill also modifies the Income Tax Act of 2025 and the Finance Act of 2026.

It is worth noting that the modification does not instantly impose costs on UPI transactions. Instead, it grants the Central government the legal authority to announce, at a later date, which electronic payment methods may incur charges. Until such a notification is issued, UPI transactions will continue using the current system.

What changes under the new law? 

The amendment replaces the existing provision under Section 10A of the Payment and Settlement Systems Act, 2007.

The Bill states: "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."

In layman's words, the change provides the Central government the ability to decide which digital payment methods would incur charges in future announcements. Although the legal restriction has been lifted, no notification has been made thus far. This means that UPI transactions will continue to be free under the current system.

Why is the amendment important?

Currently, Section 10A of the Payment and Settlement Systems Act prohibits banks and payment system providers from levying any direct or indirect costs on electronic payment modalities covered under Section 269SU of the Income Tax Act.

Section 269SU compels firms having a yearly turnover of more over Rs 50 crore to offer clients specific digital payment choices, such as BHIM-UPI QR codes and RuPay debit cards. Because of this legal restriction, banks and payment service providers have been unable to receive Merchant Discount Rate (MDR) for the declared electronic payment channels.

With the amendment passed, this legal obstacle has been lifted, providing the government more leeway in developing future policies on digital payment rates.

Government says move aims to build a sustainable digital payments system 

According to the government, the amendment aims to create a long-term revenue model for banks, payment service providers (PSPs), and enterprises that develop and operate India's digital payments infrastructure.

Officials believe that allowing a small fee for certain digital payment services could help support long-term investment in payment infrastructure while also ensuring the continued growth of India's rapidly expanding digital payments ecosystem.

What is Merchant Discount Rate (MDR)?

The Merchant Discount Rate (MDR) is the cost that retailers pay banks or payment service providers to execute digital payment transactions. Currently, retailers often pay MDR on credit card transactions and other payment methods.

However, UPI transactions do not attract MDR, which is one of the primary reasons for its broad appeal throughout the country. Similarly, service charges are already applied to some Real-Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT) operations.

UPI has grown rapidly, debate over MDR continues

For several years, there has been controversy about installing MDR on UPI. Banks and payment industry stakeholders have often said that they require a steady stream of revenue to maintain and develop India's digital payments infrastructure.

Simultaneously, successive administrations have advocated zero-cost digital payments to increase financial inclusion and diminish the use of cash. According to industry experts, if MDR is introduced in the future, it may only apply to high-value merchant transactions, while person-to-person (P2P) UPI payments will likely continue to be free of charge. However, no such idea has been officially announced by the government thus far.