Parliament passes the Taxation and Other Laws (Amendment) Bill, 2026, which proposes to amend Section 10A of the Payment and Settlement Systems Act, 2007, the “UPI and Services Steering Committee” headed by NPCI will decide on the MDR, if any. No fee exists yet. Here is what it means for you, and for the shopkeeper you pay.
Why this is in the news
On 6 August 2026, the Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026. On 10 August 2026, the Rajya Sabha returned it after discussion, and because it is a Money Bill the Lok Sabha had the final say. The Bill was introduced in the Lok Sabha on 4 August 2026.
One clause in this Bill touched a nerve. It removes the legal ban that stops banks from charging for UPI payments. Within hours, a familiar fear returned: will paying by UPI now cost money? The Finance Ministry stepped in to say no, and a political and economic row broke out over who really pays for a system that 55 crore Indians treat as free.
What exactly the law does
The Bill amends Section 10AA clause in the Payment and Settlement Systems Act, 2007 that currently forbids banks and payment providers from charging any fee on certain notified digital payments, including UPI and RuPay debit cards. of the Payment and Settlement Systems Act, 2007. Until now, Section 10A said banks and payment system providers cannot impose, directly or indirectly, any charge on a person paying through the electronic modes listed under Section 269SU of the Income-tax Act. Those modes include UPI, BHIM-UPI and RuPay debit cards.
The amendment replaces that fixed reference with a wider power. From now, the central government can notify which electronic payment modes, or which transactions, may carry a charge. In plain terms, the law does not itself impose any fee. It only removes the padlock and hands the key to the government.
Finance Minister Nirmala Sitharaman told Parliament that the amendment is only an enabling provision and imposes no tax or charge on UPI users. The legislation does not itself impose MDR on UPI. The government has said that, once the Bill is enacted, the UPI and Services Steering Committee headed by NPCI will decide whether MDR should be introduced and at what level.
What is MDR, and why zero MDR came in
Merchant Discount Rate (MDR)The fee a merchant pays to banks and payment networks for accepting a digital payment. It is a percentage of the transaction value and is normally not charged to the customer directly. is the fee a shop pays for accepting a digital payment. When you tap a card, the shopkeeper's bank keeps a slice, the card network keeps a slice, and your bank keeps a slice. That slice is MDR. The customer usually does not see it.
For UPI and RuPay debit cards, that slice has been zero since 1 January 2020. To push digital payments, the government made MDR nil on these two modes through changes to Section 10A of the Payment and Settlement Systems Act and Section 269SU of the Income-tax Act. Section 269SU also required every business with turnover above 50 crore rupees to offer UPI and RuPay acceptance. Free acceptance plus mandatory acceptance is a large part of why UPI spread to the smallest shops.
Other payment modes still carry MDR. The Reserve Bank of India (RBI) allows up to 0.90% of the transaction value across card networks for debit cards. Current MDR for other Payment: 0.4-0.9% on non-RuPay debit cards, 1.5-2.2% on domestic credit cards, 1-1.5% on netbanking, and 3-4.5% on international credit cards. UPI at zero was always the outlier, not the norm.
- UPI (Unified Payments Interface)
- A system built by NPCI that lets you send money between bank accounts instantly using a phone.
- P2M (Person to Merchant)
- A payment from a customer to a shop or business, as against P2P, which is one person paying another.
- Interchange fee
- The part of MDR that the merchant's bank pays to the customer's bank in a card transaction.
- Acquiring bank
- The merchant's bank, which onboards the shop and receives the payment on its behalf.
- Money Bill
- A Bill dealing only with taxes or government spending, where the Rajya Sabha can suggest but not block, and the Lok Sabha decides.
How we got here
UPI turned free digital payment into a habit. UPI launched in 2016. In FY26 it processed about 24,162 crore transactions worth roughly 314 lakh crore rupees. The International Monetary Fund recognises it as the world's largest real-time payment system by volume, and industry report puts India at close to half of all real-time payments made anywhere.
This success in last 10 years have been created at a cost that someone has to pay. The system behind every QR scan, that is authorisation, settlement, fraud checks, cybersecurity, dispute handling and round-the-clock uptime, costs money to run. With UPI at zero MDR, Who Pays for UPI Today? Currently Banks and payment processors absorb part of the cost and Taxpayers bear the rest through government subsidy.
The subsidy runs through an incentive scheme Under the ‘Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions (P2M)’, launched in December 2021, the government subsidizes UPI transactions below ₹2,000. This subsidy is capped at 0.15% of transaction value and shared among banks, payment service providers, and third-party apps. The government paid ₹1,389 crore in 2021-22, rising to ₹3,631 crore by 2023-24, but this has since fallen, with only ₹2,000 crore budgeted for 2026-27. Notably, from 2021-22 to 2024-25, the total subsidy of ₹8,730 crore covered just 11% of the actual cost incurred by the payments industry, as per the Standing Committee on Finance.
UPI launched by NPCI.
Zero MDR made mandatory on UPI and RuPay debit cards.
Government incentive scheme for low-value UPI and RuPay debit begins.
Standing Committee on Finance flags that incentives covered only 11% of industry cost.
Taxation and Other Laws (Amendment) Bill, 2026 introduced in Lok Sabha.
Lok Sabha passes the Bill by voice vote.
Rajya Sabha returns the Money Bill after discussion.
The economics: someone always pays
The core idea is simple and uncomfortable. A payment system that is free to use is not free to run. If the people who use it do not pay, then either the companies that build it pay, or the government pays with tax money, or the system is starved of investment. There is no fourth option.
As RBI Governor Sanjay Malhotra said, the cost ultimately has to be borne somewhere — either by the general public through taxes or through an MDR-based user-pays model. "Ultimately, it is the consumer, in some way or the other, who is paying (for) it already. It may not be the same consumer, it may be the general economy and you don’t get to see it directly. Somehow, it is already getting passed on; it may not be directly on the user-pays principle," Malhotra said on Wednesday after RBI MPC meeting.
His view is that a user-pays model, where those who use a service fund it, is one honest way to make that cost transparent instead of hiding it in the Budget.
The counter-view says UPI is now a public utility, like a road or a bridge, and public utilities are often funded by the state on purpose because the wider gains.
Charging fees on any UPI transaction goes against the spirit of digital payments. UPI has made money transactions incredibly easy. If this is increasing banks' expenses, consider that they are also saving on ATMs and checks. The government's printing costs are decreasing. The cost of transporting and handling notes is reduced. Digital payments remain under government surveillance, reducing the potential for black money. Also Banks earn interest on savings. Banks can not earn interest on cash. Money in banks helps banks earn interest as well as Banks loans to other companies/governments which helps them finance the Nation. Cash can not finance the nation.
Comment from A Cafe Owner: Like most of you, I always believed UPI was the absolute best thing to come out of the BJP government. It completely transformed how we live and do business. But the latest move to bring back the Merchant Discount Rate (MDR) feels like the end of that golden era. The FM recently clarified that “MDR applies only to merchants and not to end users/customers.” They want us to believe ordinary citizens won't feel the pinch. But as a small cafe owner, I know the math: if you tax the merchant, the buyer ultimately pays. We operate on razor-thin margins. If digital platforms start taking a cut out of every transaction, small businesses cannot absorb that loss. The burden will inevitably hit the consumer—either through higher menu prices, or a forced shift back to cash for small bills.
However, Payments infrastructure, merchant servicing, security, compliance and fraud prevention, however, require continuous investments. So does scaling infrastructure, cybersecurity and fraud risk management, and building for what comes next, including agentic commerce, AI-native payments and new ways for merchants to grow.
The next chapter of UPI cannot only be about processing more transactions. For UPI to now leapfrog into the next phase, it needs to be about creating more value with every transaction, for consumers, merchants and the ecosystem that powers them.
How a fee would actually work
Nobody has fixed a rate. The government's own framing is that any charge would be nominal and far below card MDR, would apply only to a narrow set of larger merchants above a turnover threshold, and would leave the vast majority of everyday payments untouched. Officials have said more than 90% of merchant transactions, the milk, vegetables and grocery kind, would not attract any fee.
Industry estimates give a sense of scale. Mehul Mistry of the fintech firm Zeta has said discussions point to a UPI MDR of roughly 0.05% to 0.07% for large merchants, with RuPay debit card MDR a little higher at 0.15% to 0.20%, applied only above an annual turnover of about 1 to 1.5 crore rupees, while small merchants and person-to-person payments stay free. These are estimates, not the final rule.
The Maths Behind the MDR Debate. In FY26, only around 4% of Person-to-Merchant (P2M) UPI transactions were above ₹2,000. However, these relatively few high-value transactions accounted for nearly two-thirds of the total value processed through P2M UPI. This creates a potential policy opportunity: a targeted MDR on high-value UPI payments made by large merchants could generate meaningful revenue for the payments ecosystem while keeping small-value transactions and small merchants largely protected. .
Old rule against new rule
| Point | Before the amendment | After the amendment |
|---|---|---|
| Legal position | Section 10A barred any charge on UPI and RuPay debit | Government may notify modes or transactions that can carry a charge |
| Who can be charged | Nobody, by law | To be decided, expected to be large merchants only |
| Customer impact | Free | Government says still free for users |
| How funded | Bank and fintech costs plus government subsidy | Same for now, with a possible merchant fee later |
Who is affected
Consumers, in the government's telling, are not touched. Person-to-person transfers and everyday small payments stay free either way.
Small merchants are the political heart of the issue. The government has repeatedly said they will not pay MDR, and the turnover threshold is meant to keep them out of the net.
Large merchants and chains are the likely target. Big retailers, e-commerce firms and high-turnover businesses may pay a small fee on larger transactions. Whether they absorb it or pass it into prices is the key uncertainty.
Banks and fintech firms, that is PhonePe, Google Pay, Paytm and the banks behind them, stand to gain a revenue line for a service they now run largely without one. Their argument is that revenue funds security and the next phase of investment.
Government finances gain either way. A merchant fee would let the state reduce the yearly subsidy without starving the system.
The debate
The case for a charge is that the current model does not add up. A March 2026 report of the Standing Committee on Finance found that government incentives between 2021-22 and 2024-25 covered only 11% of the cost the payments industry actually bore, with the Centre paying 8,730 crore rupees over those four years. The annual cost of running UPI and RuPay debit infrastructure has been estimated at as high as 20,000 crore rupees. A small, targeted fee on large merchants, supporters say, is fairer than an open-ended subsidy funded by all taxpayers.
The case against runs on three tracks. First, pass-through. Congress leader Jairam Ramesh argued that the burden will land on ordinary people and called the claim that a fee is the only route to sustainability wrong. A cafe owner making the same point put it plainly: on thin margins, a cut on every sale ends up in the menu price or pushes small bills back to cash. A LocalCircles survey found only 12% of respondents would keep using UPI if a fee were levied on payments above 3,000 rupees at large merchants, and just 2% if merchants passed the fee on.
Second, the strategic angle. The Global Trade Research Initiative (GTRI) warned that the change comes as the United States Trade Representative's 2026 trade barriers report flagged India's UPI and RuPay, along with Brazil's Pix, as concerns. GTRI's Ajay Srivastava argued India should not reshape UPI policy to suit foreign card firms like Visa and Mastercard, and should protect its own competition and policy autonomy. GTRI still accepts a nominal charge on large, high-turnover merchants as reasonable.
Third, the principle. Critics note that going cashless already saves the system money: less currency printing, less cash handling, more money sitting in banks where it can be lent, and better tax visibility. If the state gains from digital payments, they ask, why charge for them at all.
How others handle it
India is not alone in this tension. Brazil's Pix, a similar free instant-payment system run by its central bank, has faced the same question of who funds the rails, and the same foreign trade complaints. In card markets, Europe caps interchange fees by regulation rather than banning them, which keeps merchant costs low without making the service free. The United States, by contrast, has among the highest card fees in the rich world, which is one reason its regulators keep returning to the issue. India's own history is instructive too: in 2020 it chose the boldest path, zero MDR by law, and is now testing whether that choice is sustainable at 314 lakh crore rupees of annual value.
What to watch next
The law is only the first step. The real decisions are still pending. Watch for the government notification that would actually name any charged mode or transaction, the recommendation of the NPCI-led UPI and Services Steering Committee on whether to bring MDR and at what rate, and the exact turnover threshold and transaction floor that would define who pays. Watch also the FY27 subsidy: if a merchant fee arrives, the 2,000 crore rupee allocation could shrink in later years. And watch merchant behaviour, because the answer to whether consumers feel anything depends entirely on whether big retailers absorb a fee or price it in.
Exam relevance
RBI Grade B: ESI paper and Finance & Management, payment systems, RBI and NPCI roles, financial inclusion.
NABARD Grade A: ESI, digital financial inclusion and rural payments, government schemes.
UPSC CSE: GS Paper 3, Indian economy, banking, digital public infrastructure and inclusive growth.
Likely question angles:
- What is MDR, and evaluate the case for and against zero MDR on UPI.
- Discuss the fiscal sustainability of subsidising digital public infrastructure.
- Explain the role of NPCI and RBI in India's retail payment system.
The bottom line
The law has changed, but UPI payments remain free for now. The amendment has reopened the debate over whether a payment system of UPI's scale can remain free indefinitely and, if not, who should bear the cost of sustaining the ecosystem. For now, the emerging policy approach appears to be to target large merchants and high-value transactions while keeping everyday small-value UPI payments free. However, the actual impact will depend on the notification and MDR rates that are eventually prescribed.
Frequently asked questions
Quick self-check
1. The Taxation and Other Laws (Amendment) Bill, 2026 amends which law to enable UPI charges?
It amends Section 10A of the Payment and Settlement Systems Act, 2007.
2. Since when has MDR been zero on UPI and RuPay debit cards?
Zero MDR on UPI and RuPay debit came into force on 1 January 2020.
3. As per the Standing Committee on Finance, government incentives covered what share of the industry's cost from 2021-22 to 2024-25?
Incentives of 8,730 crore rupees covered only about 11% of the cost.
4. Who is expected to decide whether MDR returns and at what rate?
The government has said this committee, headed by NPCI, will take the call.
Figures are as of August 2026 and are drawn from official releases and reported estimates. No consumer UPI fee is in force at the time of writing. Any future charge would require a separate government notification.
