Can the Government Levy Charges on UPI Payments? What the Proposed Law Means for Merchants and Customers

The passage of the Taxation and Other Laws (Amendment) Bill, 2026 in the Lok Sabha has triggered a nationwide debate over the future of Unified Payments Interface (UPI) transactions. The discussion centres on whether the government can now allow banks and payment service providers to levy charges on UPI payments through a revised legal framework.

While the Bill does not introduce any immediate fee or Merchant Discount Rate (MDR) on UPI transactions, it amends the Payment and Settlement Systems (PSS) Act, 2007 to provide the legal framework that could enable the government to notify charges on specified digital payment modes in the future.

What Changes Has the Bill Proposed?

At present, Section 10A of the Payment and Settlement Systems Act bars banks and payment system providers from imposing, either directly or indirectly, any charge on a person making or receiving payments through electronic modes prescribed under Section 269SU of the Income-tax Act.

The Taxation and Other Laws (Amendment) Bill, 2026 proposes to replace this reference with the phrase “one or more electronic modes of payment as the Central Government may, by notification, specify.”

This change shifts the authority to identify eligible electronic payment modes from the Income-tax Act to the Payment and Settlement Systems Act itself. As a result, the Central Government will be able to notify covered digital payment systems independently under the PSS Act.

Does the Bill Introduce UPI Charges?

No. The Bill does not impose any fee on UPI transactions, nor does it announce the introduction of a Merchant Discount Rate.

Instead, it creates the legal basis that would allow the government to modify the existing zero-MDR framework in the future through notification, if it chooses to do so. Any decision regarding charges on notified electronic payment modes would require a separate policy decision after the amended law comes into force.

This distinction has become the centre of the ongoing debate, with supporters arguing that the amendment only provides legal flexibility, while critics fear it could eventually pave the way for transaction charges on digital payments.

Why Is the Amendment Significant?

UPI has become India’s most widely used digital payment system largely because users and merchants currently do not pay Merchant Discount Rate on eligible transactions. The proposed amendment does not alter that position immediately, but it removes the existing legal linkage with the Income-tax Act and establishes an independent mechanism for regulating notified electronic payment modes.

As a result, future policy decisions regarding MDR or other charges would no longer depend on provisions under the Income-tax Act but could be implemented under the Payment and Settlement Systems Act through government notification.

Finance Minister Nirmala Sitharaman Clarifies Government’s Position

Amid concerns over the proposed amendment, Finance Minister Nirmala Sitharaman clarified that any Merchant Discount Rate (MDR), if introduced in the future, would apply only to merchants and not to customers using UPI for payments.

In a post on X, Sitharaman said the UPI and Services Steering Committee, headed by the National Payments Corporation of India (NPCI), is yet to take a decision on MDR. She added that any such discussion would take place only after Parliament passes the Taxation and Other Laws (Amendment) Bill, 2026.

“Merchant Discount Rate (MDR) applies only on the merchants and not on the end users/customers. It will support the Banks & Fintech to invest more on infrastructure, innovation & security. All users of UPI will reap the benefits of this investment.”

According to the Finance Minister, the objective of any future MDR framework would be to strengthen the digital payments ecosystem by enabling banks and fintech companies to invest in infrastructure, technology upgrades and security measures.

Congress Questions the Proposal

The proposed legal change also drew criticism from the Opposition. Congress leader Jairam Ramesh argued that the government’s position on MDR was misleading and alleged that the financial burden would ultimately be borne by ordinary citizens.

He also rejected the argument that introducing MDR is the only way to ensure the long-term financial sustainability of the UPI ecosystem, setting the stage for a political debate over the future of digital payment charges.

How Merchant Discount Rate (MDR) Works

Merchant Discount Rate is a fee paid by businesses to banks, payment gateways and card networks for processing digital transactions. Customers do not directly pay this charge, but merchants bear the cost for every eligible transaction.

At present, eligible UPI transactions operate under a zero-MDR framework, meaning merchants are not charged a transaction fee. This policy has played a significant role in the rapid adoption of UPI across businesses of all sizes.

In contrast, businesses accepting card payments generally pay MDR on every successful transaction. According to the available information, charges for Visa and Mastercard transactions typically range between 1.0% and 3.0% for credit cards and around 0.4% to 1.0% for debit cards.

These charges are shared among acquiring banks, payment processors and card networks for facilitating electronic payments.

US Trade Concerns Over India’s Digital Payments Ecosystem

The debate around the proposed amendment has also drawn attention to international concerns regarding India’s digital payments framework. The United States Trade Representative (USTR), in its report on foreign trade barriers, raised issues over policies governing electronic payment services in India.

According to the report, certain policies appear to favour domestic payment service providers over foreign companies, creating what it described as an uneven competitive environment.

The USTR also highlighted that American electronic payment service providers are unable to participate in the UPI ecosystem, including credit transactions on UPI, on a level playing field with RuPay.

GTRI Says India Should Decide UPI Policy Independently

Economic think tank Global Trade Research Initiative (GTRI) has argued that India should not alter its UPI policy in response to external trade pressure and should instead prioritise the long-term sustainability of its own digital payments ecosystem.

According to GTRI, the zero-MDR policy has played a crucial role in the rapid expansion of UPI by allowing consumers, small businesses and roadside vendors to make and receive digital payments without transaction charges.

However, the organisation noted that maintaining such a large payment network requires continuous investment by banks, the National Payments Corporation of India (NPCI) and payment companies in cybersecurity, fraud prevention, server infrastructure, dispute resolution systems and network expansion.

Alternative Funding Models Suggested

While acknowledging the need for a sustainable funding mechanism, GTRI said introducing a universal Merchant Discount Rate is not the only available solution.

The think tank suggested several alternatives, including targeted budgetary support, government incentives, charges limited to large commercial transactions, cross-subsidisation through financial services and narrowly designed fees applicable only to high-turnover merchants.

“A sustainable funding model may therefore be necessary. But financing the system does not automatically require a general merchant charge.”

GTRI Founder Ajay Srivastava said India should not introduce MDR merely to address US trade concerns or to protect the commercial interests of foreign payment companies such as Visa and Mastercard.

For now, the proposed amendment only establishes the legal framework under the Payment and Settlement Systems Act. Whether any Merchant Discount Rate is introduced, the payment modes covered, and the manner in which such a framework may operate will depend on future decisions taken by the Central Government and the relevant authorities after the legislative process is completed.

What the Proposed Law Means for Merchants and Customers

Based on the provisions of the Taxation and Other Laws (Amendment) Bill, 2026 and the government’s clarification, there is no immediate change in the way UPI payments are processed for consumers or businesses.

• The Bill does not impose any charge on UPI transactions.
• Customers will continue to make UPI payments without any announced transaction fee.
• The amendment creates the legal framework that could allow the government to notify charges on specified electronic payment modes in the future.
• According to Finance Minister Nirmala Sitharaman, any future Merchant Discount Rate (MDR) would apply to merchants, not end users.
• The UPI and Services Steering Committee headed by NPCI has not yet taken a decision on MDR.

The amendment has nevertheless sparked a wider discussion over how India’s rapidly growing digital payments ecosystem should be funded. While the government has highlighted the need for greater investment in infrastructure, innovation and security, critics and industry experts continue to debate whether MDR is the most appropriate way to achieve that objective.

Frequently Asked Questions

Has the government introduced charges on UPI payments?

No. The Taxation and Other Laws (Amendment) Bill, 2026 does not impose any charge on UPI transactions.

Can banks start charging customers immediately?

No. The Bill only creates the legal framework that could allow the government to notify charges on specified electronic payment modes in the future. No such decision has been announced.

Who would pay MDR if it is introduced?

According to Finance Minister Nirmala Sitharaman, Merchant Discount Rate applies to merchants and not to end users or customers.

Why is MDR being discussed?

The government says a sustainable funding mechanism could help banks and fintech companies invest more in digital payment infrastructure, innovation and security.