Lok Sabha passes Bill enabling Centre to allow UPI charges, MDR on digital payments
The Lok Sabha passed a bill amending the Payment and Settlement Systems Act, 2007, empowering the Central Government to permit charges — including Merchant Discount Rate (MDR) — on specified digital payment transactions
The amendment removes the existing statutory provision that has kept UPI and RuPay debit card transactions free of MDR since 2020
The bill does not itself impose charges; it creates an enabling legal framework under which the government may later notify which electronic payment modes may attract charges
The change follows requests from banks and payment service providers, who cite the need for sustainable revenue models to fund and expand digital payment infrastructure
Payment and Settlement Systems Act, 2007 — Section 10A
The Payment and Settlement Systems (PSS) Act, 2007 is the principal law regulating and supervising payment systems in India, administering powers primarily through the Reserve Bank of India (RBI). Section 10A of the Act, as it stood, statutorily barred banks and payment system providers from levying MDR on prescribed electronic modes — specifically UPI and RuPay debit cards — as notified under Section 269SU of the Income-tax Act.
Key Details
- PSS Act, 2007 designates the RBI as the regulator/supervisor of payment and settlement systems in India, with powers to authorise, regulate, and inspect payment system operators
- Section 269SU of the Income-tax Act, 1961 (inserted via Finance Act, 2019) mandates that specified large businesses provide prescribed low-cost/zero-MDR electronic payment modes to customers
- MDR (Merchant Discount Rate) is the fee a merchant pays to their bank/payment provider for processing an electronic payment transaction, typically a percentage of transaction value
- The recent amendment is carried through the Taxation and Other Laws (Amendment) Bill, which modifies Section 10A of the PSS Act, 2007, removing the blanket zero-MDR mandate and replacing it with government discretion to notify which modes remain free
This is a direct amendment of the statutory provision (Section 10A) that has legally enforced the zero-MDR regime on UPI/RuPay since 2020 — the bill removes that fixed bar and vests discretion in the Central Government to decide case-by-case.
Zero-MDR Policy on UPI and RuPay (since 2020)
In January 2020, the government abolished MDR on UPI transactions and RuPay debit card transactions to accelerate digital payment adoption and financial inclusion, making these instruments free for both merchants and customers. This policy has been credited with UPI's rapid growth into India's dominant retail payment rail.
Key Details
- Zero-MDR on UPI/RuPay debit cards took effect January 1, 2020
- UPI now accounts for roughly 88% of all digital transactions in India by volume, reflecting its dominance in the retail digital payments landscape
- To offset the loss of MDR-based revenue for banks and payment providers, the government introduced the Incentive Scheme for promotion of RuPay Debit Card and low-value BHIM-UPI transactions, providing budgetary compensation to banks
- Reports on the proposed framework suggest a possible MDR of about 0.25% to 0.4% could be levied on UPI merchant payments above a threshold (reported around ₹2,000), while person-to-person (P2P) UPI transfers would likely remain outside the charge regime
The bill directly targets the legal foundation of the 2020 zero-MDR policy, opening the door — though not immediately mandating — a shift away from blanket free UPI transactions, particularly for larger merchant payments.
Institutional Roles: RBI, NPCI, and Government in Payment Regulation
India's digital payments ecosystem operates through a layered institutional structure: the RBI regulates payment systems under the PSS Act, 2007; the National Payments Corporation of India (NPCI), a not-for-profit entity promoted by RBI and banks, operates UPI, RuPay, and other retail payment rails; and the Central Government (Finance Ministry) sets tax-linked mandates (like Section 269SU) and, after this amendment, gains explicit power to notify chargeable payment modes.
Key Details
- NPCI was incorporated in 2008 and operates UPI (launched 2016), RuPay, IMPS, BHIM, among other retail payment systems
- Under the amended framework, the Central Government — not RBI alone — will decide which digital payment methods may attract charges, given the statutory link to Section 269SU of the Income-tax Act
- The bill was passed by voice vote in the Lok Sabha
The amendment shifts a component of payment-pricing policy explicitly into the government's domain (via a tax-law-linked provision), rather than leaving it purely to RBI's regulatory discretion, which is a notable feature of India's payments governance architecture for Polity/Governance analysis.
- Governing law amended: Payment and Settlement Systems Act, 2007 — Section 10A
- Vehicle for amendment: Taxation and Other Laws (Amendment) Bill, 2026
- Bill introduced in Lok Sabha: August 4, 2026 (by the Finance Minister); passed by voice vote
- Zero-MDR on UPI and RuPay debit cards in effect since: January 1, 2020
- UPI share of India's digital transaction volume: approximately 88%
- Reported potential MDR range if notified: approximately 0.25% to 0.4% on UPI merchant payments above roughly ₹2,000, with P2P transfers expected to remain exempt
- Statutory link: Section 269SU, Income-tax Act, 1961 (inserted via Finance Act, 2019)