The Unified Payments Interface (UPI), a key spearhead of India’s digital revolution, is once again in the news. A new debate has erupted in the country regarding UPI payments, which are seamlessly made everywhere, from buying vegetables to shopping at large malls. Will every digital payment now cost you a small fortune? This question arose when the Lok Sabha, the lower house of Parliament, approved the Taxation and Rate Laws (Amendment) Bill, 2026. This bill proposes a major amendment to Section 10A of the Payment and Settlement Systems Act, 2007. This legislative amendment provides banks and payment service providers (PSPs) with the legal framework to levy fees, or merchant discount rates (MDR), on UPI and other notified digital payments. While this doesn’t mean that every sip of tea you drink will be taxed or charged from tomorrow, it has certainly laid the legal foundation for a future tax regime.
Amendment to Section 10A: Why is this relief being given to payment systems and banks?
To promote digital payments in India, the government implemented a zero-MDR policy. Under this policy, banks and fintech companies (such as PhonePe, Google Pay, and Paytm) were not allowed to charge any fees on UPI transactions. However, as digital transactions reached billions over the past few years, the cost of maintaining this massive infrastructure increased exponentially. Due to the significant costs of server maintenance, cybersecurity, fraud prevention, and data center costs, banks and payment companies had long sought financial assistance or permission to levy fees from the government. By removing the old statutory restriction under Section 10A, the government has created a flexible model whereby the Union Finance Ministry and the Reserve Bank of India (RBI) will be able to determine, through periodic notifications, the fees applicable to specific categories of payments.
What is MDR and what will be its impact on traders and consumers?
In the world of digital payments, the ‘Merchant Discount Rate’ (MDR) is the fee a merchant pays to a bank or payment gateway for accepting digital payments from their customers. When you make a card or digital payment at a store, a small percentage (such as 0.5% or 1%) of the amount is split between the merchant acquiring bank, card network, and payment app. According to the new 2026 bill, the government is reserving the right to impose MDR on high-value or specific business UPI transactions. Small payments up to ₹2,000 are expected to be excluded from this scope or subject to a minimum slab to provide relief to small merchants and street vendors. Despite this, medium and large merchants may have to adjust their margin policies slightly.
How much will this cost the average user? The truth about P2P vs. P2M transactions
The biggest fear among ordinary citizens is whether there will be charges for sending money to friends and family (P2P)? According to financial experts and government sources, there will be no charges for general P2P money transfers between the general public. The government’s primary focus is on commercial or business (P2M) payments. Furthermore, fee rules may apply to payments made via UPI using credit cards or high-value wallet-based business transactions. If MDR is imposed on a merchant, there is a fear that some merchants may partially increase the prices of goods and services to offset this cost, which could indirectly impact the end consumer.
How will the balance sheets of fintech companies and banks change?
Over the past few years, fintech startups and private and public sector banks have invested heavily in India’s digital payments ecosystem. However, these companies faced significant challenges in monetization due to the ‘zero-MDR’ regime. This measure, part of the Taxation Amendment Bill 2026, will provide a sustainable revenue model for entities providing digital payment infrastructure. This will attract new foreign and domestic investment into the fintech sector, further improving payment technologies and deploying advanced artificial intelligence (AI) tools to prevent online fraud. This legislation is being seen as a major relief for the fintech sector.
What could be the impact on the journey towards Digital India? Challenges and Precautions
While this amendment is considered beneficial for the economic health of the digital economy, it also poses some policy challenges. The biggest challenge is that the imposition of fees may force small businesses and rural residents back to the cash economy. Free and accessible UPI services have been a major pillar of financial inclusion in India. If banks or payment platforms begin charging excessive or arbitrary fees, this could widen the digital divide. This is why the government has retained the full power to set fees to prevent any arbitrariness or monopoly and to create a transparent consumer grievance redressal mechanism.
The way forward: When will the rules be implemented and what will happen next?
The passage of the bill by Parliament does not mean that UPI charges have come into effect immediately. This bill only provides an enabling legal framework. Following this, the Union Finance Ministry, the Reserve Bank of India (RBI), and the National Payments Corporation of India (NPCI) will consult with each other and issue detailed guidelines and notifications. These notifications will clarify the MDR charges for transactions above a certain threshold, which sectors will be exempted, and how merchants will adjust. India’s digital payments ecosystem is now entering its maturity phase, where balancing innovation with financial stability has become the need of the hour.