Govt looks to bring back merchant fee on UPI transactions

Mumbai: The finance ministry has proposed amendments to the Payment and Settlement Systems Act, 2007, that could pave the way for the return of merchant discount rate (MDR) on unified payments interface (UPI) transactions. The changes, which are unlikely to burden UPI users, would give government the flexibility to levy merchant charges on notified digital payment modes, as it seeks a sustainable funding model for the platform’s next phase of growth.

Finance minister Nirmala Sitharaman will introduce the Taxation and Other Laws (Amendment) Bill, 2026 in Lok Sabha on Tuesday, seeking amendments to the payment and settlement systems law, the Income-Tax Act, 2025, and the Finance Act, 2026, according to the list of business for the Lower House.

The amendment on payment and settlement systems proposes to scrap the provision under Section 10A that currently bars banks and payment system providers (PSPs) from levying MDR on transactions done through any electronic mode of payment.

MDR is a fee that businesses pay to banks and PSPs for processing digital transactions. The government currently subsidizes part of the cost incurred by such players.

“In clause 2 of the Bill, in the Payment and Settlement Systems Act, 2007, amendment of section 10A in order to remove the reference of provision of Income-Tax Act and also to provide that no bank or system provider shall impose, whether directly or indirectly, any charge upon a person making or receiving a payment by using one or more electronic modes of payment as may be notified by the central government,” said the amendment note seen by Mint.

Power to fix fees

The Bill will allow the government to decide which digital payment methods may attract fees. The government is expected to notify the rate of MDR and the type of transactions it can be levied on, once the bill has been approved. Reports had earlier suggested that MDR may only be applicable on large value or large merchant transactions.

The Bill does not detail any fees, rates or a timeline for any specific payment instrument. It also does not propose any fee for consumers using UPI, which means the burden of MDR would fall on merchants.

The government had banned MDR on UPI and RuPay debit card transactions from January 2020 to accelerate digital payments and promote home-grown payment systems.

The move by the finance ministry comes after a Parliamentary Standing Committee on Finance, in a March 2026 report, called for a “sustainable funding mechanism” for UPI, saying that the zero-MDR framework is financially unsustainable in the long run.

The panel had noted that UPI has the potential to grow ten-fold over the coming years, estimating that the platform has the ability to add 600 million users and process 100-150 billion transactions every month. It said this would require investments in technology, resilience and merchant acceptance infrastructure, which cannot be supported only by government incentives, and that the absence of a viable revenue stream had constrained banks and PSPs from investing in innovation, cybersecurity and infrastructure needed to support the next phase of UPI growth.

The committee noted that the incentive support under the government scheme constitutes only 11% of the cost incurred by the industry and 14% of the potential MDR collected by the industry.

Subsiding costs

The government currently subsidizes part of the cost incurred by such players on payments of up to ₹2,000. The Budget for 2026-27 estimated the subsidy payout to be ₹2,000 crore as against ₹2,196.21 crore paid in 2025-2026 and ₹1,922.77 crore in 2024-25.

India’s UPI platform processed 241.6 billon transactions worth ₹314.2 lakh crore in FY26, up 30% on year in terms of volume and 21% in terms of value of transactions. UPI had 55.49 crore users as of June 2026, as per the National Payments Corporation of India (NPCI), which operates and manages the platform.

The platform touched a new monthly record in July, processing 23.7 billion transactions amounting to ₹29.9 lakh crore, a year-on-year rise of 22% in volume and 19% in value terms.

Amrish Rau, chief executive officer at Pine Labs, a financial infrastructure and services company, in a post on social media platform X, said while the reintroduction of MDR “will undoubtedly bring about a debate”, it is important to remember that both Brazil’s Pix and China’s real-time payment systems have always had merchant charges of 30-40 basis points and have still achieved over 90% penetration across users and merchants, compared to roughly 35-40% in India.

“Looking at the near-zero investment scenario over the last six years, the pace of growth is naturally slowing,” Rau said, adding that further expansion will need to be funded through continued investments in IT, innovation, and cyber security. “These costs have increased by almost 300% over the last 12–24 months. While there should be some recovery of these investments, P2P transactions—and charges to consumers—should continue to remain zero.”

Beyond UPI

With the Taxation and Other Laws (Amendment) Bill, 2026 the government aims to provide statutory backing to three key tax and financial measures announced by the government earlier.

Apart from the payment and settlement systems law, the government seeks to replace the Income-tax (Amendment) Ordinance, 2026, which provided tax relief to foreign portfolio investors (FPIs), by incorporating its provisions into law through amendments to the Finance Act, 2026. The Lok Sabha agenda includes the laying of an explanatory statement detailing the reasons for promulgating the ordinance.

In addition, the Bill proposes amendments to the Income-tax Act, 2025 to extend the tax exemption available for contract manufacturing undertaken for foreign companies. The proposal is expected to extend the sunset period for the tax benefit from assessment year FY31 to assessment year FY41, providing a longer policy horizon for eligible manufacturing arrangements.