Lok Sabha Clears Bill Giving Government Power To Allow UPI Charges

The Lok Sabha on Thursday passed a Bill amending the Payment and Settlement Systems Act, 2007, authorising the government to permit banks and payment service providers to levy charges on payments made through the Unified Payments Interface (UPI) and other notified electronic modes. The amendment was passed without discussion amid disruptions, as part of the larger Taxation and Other Laws (Amendment) Bill, 2026.

The Bill was passed by voice vote after the House resumed at 2 p.m. following an earlier adjournment. Soon after, Finance Minister Nirmala Sitharaman moved it for consideration, further amending the Payment and Settlement Systems Act, the Income Tax Act, 2025, and the Finance Act, 2026.

At the core of the change is a rewording of Section 10A. In place of the words tying free electronic payments to the modes prescribed under Section 269SU of the Income Tax Act, the law will now read that charges may apply to "one or more electronic modes of payment as the central government may, by notification, specify." Parliament has, in effect, replaced an automatic exemption with a discretionary power vested entirely in the government.

Until now, Section 10A barred banks and payment providers from imposing any charge, direct or indirect, on modes covered under Section 269SU, a provision requiring businesses with annual turnover above Rs 50 crore to accept payments through specified digital modes, including RuPay debit cards and BHIM-UPI QR codes. While RTGS and NEFT have long attracted service charges, UPI has remained the one major exception, free for both individuals and merchants.

The government has framed the amendment as a step towards a sustainable revenue model for banks, payment service providers and infrastructure firms, allowing what it has described as a nominal charge on digital payment services.

The timing is notable. Speaking just a day before the Bill's passage, Reserve Bank of India Governor Sanjay Malhotra said it would be "premature" to discuss the levy of Merchant Discount Rate on digital payments, even as he acknowledged that investment in public payment infrastructure comes at a cost that someone must eventually bear. "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 added that the government was in the process of securing the amendment, and that for now, "let us wait and watch for further developments."

Malhotra elaborated on the trade-off at the heart of the debate. Under the "user pays" principle, he explained, the merchant or the person carrying out the transaction bears the MDR directly. Absent such a charge, the cost of maintaining the ecosystem does not disappear, it simply gets passed on to the general public through taxes instead. "What is important is that we continue to invest and continue to find the means, whether it is MDR or others," he said.

The levy of MDR on UPI has long been a contentious issue, with banks and payments industry stakeholders pushing for its introduction even as the government has resisted permitting such charges, all while UPI's usage has continued to expand rapidly across the country. Some industry observers now expect that if MDR is eventually introduced, it may be limited to merchant UPI transactions above a specified value, with peer-to-peer transfers between individuals continuing to remain exempt. However, neither the Bill nor the government has laid down any such threshold or timeline, leaving the actual shape and scope of any future charge to be decided later, through a notification that is still awaited.

Inputs from PTI

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