Can govt now levy charges on UPI payments? What the proposed law means for merchants, customers

A series of claims and counter arguments linked to unified payments interface (UPI) erupted following the passage of the Taxation and Other Laws (Amendment) Bill, 2026 in Lok Sabha.

Taxation and Other Laws (Amendment) Bill, 2026 amends the Payment and Settlement Systems Act, 2007, paving the way for authorising the government to allow banks and other service providers to levy charges on payments through unified payments interface (UPI) and other notified electronic payment modes.

Currently, Section 10A of the PSS Act prohibits banks and system providers from imposing, 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 Bill proposes to replace the reference to the Income-tax Act with the words "one or more electronic modes of payment as the Central Government may, by notification, specify".

The change would allow the government to notify eligible electronic payment modes under the PSS Act itself, instead of linking the provision to the Income-tax Act.

While the Bill itself neither introduces a merchant discount rate (MDR) nor specifies a fee, it creates the legal backing for the government to modify the zero-MDR framework later.

What Nirmala Sitharaman said

Finance Minister Nirmala Sitharaman on Thursday said the MDR on digital transactions applies to merchants and not to customers, and the charge would support banks and fintech companies to invest more on infrastructure and security.

Sitharaman, in a post on X, said the UPI and Services Steering Committee headed by NPCI is yet to decide on the MDR, which would happen only after Parliament passes the Taxation and Other Laws (Amendment) Bill, 2026.

Congress leader Jairam Ramesh had alleged that the burden of MDR will fall on ordinary people, and the government's claim that this is the only way to keep UPI financial sustainable is "entirely wrong".

Sitharaman said, "...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."

UPI vs Visa or Mastercard

While the MDR on UPI payments is currently free, charges for Visa and Mastercard typically range from 1.0% to 3.0% for credit cards and 0.4% to 1.0% for debit cards. The charges are paid by business owners to processing banks, payment gateways, and card networks for every successful card swipe, tap, or online payment.

The US agency flagged the inability of American electronic payment services suppliers to participate in the UPI ecosystem, including credit transactions on UPI on a level playing field with RuPay.

Expert view

Think tank GTRI said India must not rewrite its UPI policies under US pressure, and it must defend competition, policy autonomy and the long-term sustainability of its payments ecosystem.

It said that zero MDR contributed significantly to this growth by allowing consumers, small shops and roadside vendors to make and receive payments without transaction charges.

However, banks, the National Payments Corporation of India (NPCI) and payment companies must invest in cybersecurity, fraud prevention, servers, dispute resolution and system expansion, it added.

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

"Alternatives include targeted budgetary support, government incentives, charges on large commercial transactions, cross-subsidisation from financial services and narrowly designed fees applicable only to high-turnover merchants," it said.

"India should not introduce MDR simply to address US trade complaints or protect the profits of Visa, Mastercard and other foreign payment companies," GTRI Founder Ajay Srivastava said.