UPI stays free for users, vast majority of transactions to remain free for merchants as well, says government
The government clarified that Unified Payments Interface (UPI) transactions will continue to remain free for all users, including person-to-person (P2P) transfers
Any future Merchant Discount Rate (MDR) would apply only to a limited set of merchant transactions above a specified threshold, and at a rate described as nominal and lower than typical debit and credit card MDRs
The clarification follows Parliament's passage of the Taxation and Other Laws (Amendment) Bill, 2026, which amends Section 10A of the Payment and Settlement Systems Act, 2007 — the provision that has barred any charge on prescribed digital payment modes since 2019
The vast majority of merchants, particularly small merchants, are expected to continue transacting on UPI free of charge
Section 10A, Payment and Settlement Systems Act, 2007 — the Zero-MDR Mandate
Section 10A was inserted into the Payment and Settlement Systems Act, 2007 to statutorily bar banks and payment system providers from charging any fee, direct or indirect, on transactions made through electronic modes prescribed under Section 269SU of the Income-tax Act — the legal foundation of India's "zero-MDR" regime on UPI and RuPay debit cards.
Key Details
- Section 10A was inserted in November 2019, effective January 1, 2020, mandating that no charge be levied on payments through modes prescribed under Section 269SU of the Income-tax Act, 1961 — which covers UPI and RuPay debit card transactions
- Section 269SU applies to businesses with annual turnover exceeding ₹50 crore, requiring them to mandatorily offer prescribed low-cost digital payment modes to customers
- The Taxation and Other Laws (Amendment) Bill, 2026 substitutes the reference in Section 10A from "modes prescribed under Section 269SU of the Income-tax Act, 1961" to "one or more electronic modes of payment as the Central Government may, by notification, specify" — creating the first legal room since 2020 to reintroduce a fee on specified UPI transactions
- This is a structural amendment to remove the blanket zero-charge mandate, not an automatic imposition of MDR; actual MDR levels require a further government notification
The government's assurance about a "limited," "nominal" MDR is the political and administrative response to concerns that this legislative change reopens the door to UPI charges for the first time since the 2019/2020 zero-MDR mandate.
National Payments Corporation of India (NPCI) and UPI
UPI is a real-time payment system operated by NPCI, the umbrella organisation for retail payments and settlement systems in India, and any MDR decision on UPI would be implemented through NPCI-linked governance structures rather than by individual banks unilaterally.
Key Details
- NPCI was incorporated in December 2008, as a Section 8 (not-for-profit) company under the Companies Act, promoted by the Reserve Bank of India and the Indian Banks' Association (IBA) under the framework of the Payment and Settlement Systems Act, 2007
- UPI was launched on April 11, 2016 by NPCI as an instant, real-time inter-bank mobile payment system
- UPI operates under RBI authorization and ongoing regulatory oversight, with NPCI setting operational rules for participant banks and third-party apps
- Any decision on a future MDR is expected to be taken through the "UPI and Services Steering Committee," headed by NPCI, once the enabling legislative amendment is notified
The government's clarification that MDR decisions will be threshold-based and modest in scale points to a governance role for NPCI's steering mechanism in operationalising any future fee structure.
Merchant Discount Rate (MDR) — Concept and Digital Payments Policy Trade-off
MDR is the fee a merchant pays to their bank/payment processor for accepting a digital payment, historically ranging up to 1-2% for card transactions; India's post-2019 zero-MDR policy on UPI/RuPay debit was a deliberate subsidy to drive digital payments adoption, funded instead through government incentive schemes to banks.
Key Details
- Roughly 90% of India's ~6 crore digital-payment-accepting merchants are classified as "small merchants," with annual turnover below ₹20 lakh — the segment the government says would remain unaffected by any future MDR
- Since the zero-MDR mandate removed a private revenue stream for banks and NPCI on UPI transactions, the government has periodically provided fiscal incentive packages (e.g., a scheme to incentivise low-value UPI transactions) to partially compensate banks/PSPs for absorbing infrastructure costs
- The current policy shift reflects an official rationale that continued reliance on government subsidy alone is not viable for the next phase of UPI's growth, necessitating a partially self-sustaining revenue model
- MDR is distinct from other digital payment charges such as the Payment Aggregator/Payment Gateway convenience fees, which are not covered by the Section 10A zero-charge mandate
The debate around this bill centres on rebalancing the zero-MDR model that has underpinned UPI's mass adoption since 2020, with the government positioning any new MDR as narrowly targeted rather than a broad rollback.
- Section 10A inserted into the Payment and Settlement Systems Act, 2007: November 2019, effective January 1, 2020 (zero-MDR mandate on UPI/RuPay debit)
- Section 269SU, Income-tax Act, 1961: applies to businesses with annual turnover above ₹50 crore, mandating prescribed digital payment acceptance
- NPCI incorporated: December 2008, Section 8 company, promoted by RBI and IBA
- UPI launched: April 11, 2016
- Approximately 90% of an estimated 6 crore digital-payment-accepting merchants are small merchants (turnover below ₹20 lakh/year)
- Taxation and Other Laws (Amendment) Bill, 2026 replaces the fixed Section 269SU reference in Section 10A with a Central Government notification power to specify payment modes