The amendment removes the existing legal provision that bars banks and payment system providers from imposing a Merchant Discount Rate (MDR) on notified electronic payment modes. However, the Bill does not immediately impose charges on UPI transactions. Instead, it empowers the central government to notify the digital payment modes on which such charges may be permitted in the future.
The change is part of the Taxation and Other Laws (Amendment) Bill, 2026, which was passed by voice vote in the Lok Sabha on Thursday without discussion amid opposition protests.
At present, electronic payment modes covered under Section 269SU of the Income Tax Act are exempt from MDR. Section 269SU requires businesses with an annual turnover of more than Rs 50 crore to offer specified digital payment options, including BHIM-UPI and RuPay debit cards.
The amendment replaces the existing reference to payment modes prescribed under the Income Tax Act with “one or more electronic modes of payment as the central government may, by notification, specify”, giving the government greater flexibility to decide which digital payment methods may attract charges.
The move comes as banks and payment companies have been seeking a sustainable revenue model to support the country’s rapidly expanding digital payments infrastructure. While real-time payment systems such as RTGS and NEFT already attract service charges, UPI transactions have remained free for users and merchants.The government has argued that the amendment would enable a framework under which banks, payment service providers (PSPs) and payment infrastructure companies can recover costs associated with maintaining and expanding the digital payments ecosystem, particularly for merchants and businesses.
A day before the Bill was passed, RBI Governor Sanjay Malhotra said it was “premature” to speculate on the return of MDR on digital payments, adding that investment in public payment infrastructure has to be funded by someone.
“The choices before us are simple: either the general public has to pay for it through taxes, or we have to levy the merchant discount rate (MDR), following the ‘user pays’ model,” Malhotra said.
He said the government’s proposed amendment is currently under consideration and stressed that it remains to be seen how the framework evolves.
Banks and payment industry stakeholders have long advocated the restoration of MDR on UPI and other digital payment modes, arguing that the zero-MDR regime is financially unsustainable. Industry observers have suggested that if MDR is reintroduced, it is more likely to apply to high-value merchant transactions rather than peer-to-peer UPI payments, although the government has not announced any such proposal.
(With inputs from P