Lok Sabha Clears Bill Enabling UPI Charges

The Lok Sabha has passed the Taxation and Other Laws (Amendment) Bill, 2026, which includes amendments creating a legal framework under which charges may be permitted on certain digital payment transactions, including those conducted through the Unified Payments Interface (UPI).

The legislative change amends provisions of the Payment and Settlement Systems Act, 2007, giving the Central Government greater flexibility to determine whether charges can be imposed on designated payment systems. The development has attracted particular attention because UPI transactions have largely operated under a zero-charge framework for users and merchants.

However, passage of the amendment does not mean that all UPI transactions will immediately become chargeable. The government has clarified that person-to-person UPI payments will continue to remain free for users. Any possible charging framework is expected to focus primarily on selected merchant transactions rather than ordinary transfers between individuals.

One of the mechanisms being considered is the reintroduction of a Merchant Discount Rate (MDR) for certain UPI merchant payments. MDR is generally paid by a merchant to banks or payment service providers for processing digital transactions.

Reports indicate that policymakers have been examining models under which only higher-value transactions or payments involving larger merchants could attract such charges. One proposal under discussion has reportedly considered an MDR of around 0.3% to 0.5% on transactions above ₹2,000 for merchants with annual turnover exceeding approximately ₹1.5 crore. No final fee structure has yet been announced.

Significantly, transactions above the proposed threshold reportedly constitute only around 4% of UPI transaction volume but approximately 67% of transaction value, indicating why policymakers may consider a differentiated charging mechanism rather than imposing fees across all transactions.

The debate around MDR has gained importance as banks, payment companies and technology providers continue to incur infrastructure, processing, cybersecurity and technology costs while supporting the rapidly expanding UPI ecosystem.

The proposed framework could provide payment service providers with an additional revenue mechanism while allowing the government to retain free or low-cost digital payments for smaller consumers and merchants.

For banks, fintech firms and payment companies, the amendment could therefore have significant implications for digital payment economics, merchant acquiring strategies, technology investment and revenue models.

The government has nevertheless emphasised that regular UPI users should not interpret the legislative amendment as the end of free UPI payments. Person-to-person transfers are expected to remain free, while any future MDR or transaction charge would depend on subsequent government decisions regarding the categories, thresholds and rates applicable to merchant transactions.