A significant policy shift could be on the horizon for the Unified Payments Interface (UPI), with Finance Minister Nirmala Sitharaman introducing the Taxation and Other Laws (Amendment) Bill, 2026, in the Lok Sabha. UPI, one of the world's largest real-time payment systems, handled 23.6 billion transactions worth ₹29.9 trillion in July, according to official data. The legislation seeks to amend the Payment and Settlement Systems Act, 2007, the Income-tax Act, 2025, and the Finance Act, 2026. According to Finance Ministry sources, the proposed changes are aimed at making India a more predictable and attractive destination for global investment, manufacturing and business.
Among the proposed amendments, the most closely watched relates to the Payment and Settlement Systems Act, 2007, as it concerns the future of the Merchant Discount Rate (MDR) on UPI transactions.
The Bill proposes removing the existing legal provision that prevents banks and payment service providers from levying MDR on notified electronic payment modes. MDR is the fee merchants pay banks and payment service providers for processing digital transactions. The proposed amendments also revise Section 269SU of the Income-tax Act, requiring businesses with an annual turnover of more than ₹50 crore to continue accepting specified digital payment modes, including BHIM-UPI QR codes and RuPay debit cards.
At present, neither banks nor payment service providers are permitted to levy any direct or indirect charge on the electronic payment modes notified under Section 269SU. The amendment, however, broadens the government's powers by allowing it to notify payment modes that may no longer be covered under the zero-charge framework. While the legislation does not immediately introduce MDR on UPI payments, it provides the Centre with the legal flexibility to impose such charges in the future.
According to reports citing official sources, the government is considering an MDR of less than 0.5 per cent on transactions above ₹2,000, applicable only to merchants with an annual turnover exceeding ₹1.5 crore. Another proposal under consideration is to levy MDR only beyond a specified transaction threshold. If implemented in this manner, consumers are unlikely to face additional charges, while smaller businesses may continue to enjoy free UPI payment acceptance.
The Centre abolished MDR on RuPay debit card and UPI transactions from January 1, 2020, through a notification issued under Section 10A of the Payment and Settlement Systems Act, 2007. The zero-MDR policy covers payments made through RuPay debit cards, BHIM-UPI and BHIM-UPI QR codes. The objective was to make digital payments more affordable and encourage widespread adoption across the country.
A March 2026 report of the Parliamentary Standing Committee on Finance observed that while the zero-MDR policy had accelerated digital payment adoption, it had also created financial challenges for the UPI ecosystem. The Department of Financial Services informed the committee that the policy was intended to encourage wider acceptance of UPI and RuPay payments, particularly among small merchants.
However, the panel noted that the absence of a revenue stream had made the ecosystem financially unsustainable, limiting long-term investment in digital payments infrastructure. It recommended that while government support should continue to expand digital payments in Tier-3 to Tier-6 cities, the Centre should also explore a sustainable, tiered revenue model. "The Committee would like to emphasise that establishing a viable revenue mechanism is critical to ensuring the UPI ecosystem achieves financial sustainability without perpetually straining the government exchequer," the report said.