India built the world's biggest digital payments miracle. Now comes the bill
Parliament passed the Taxation and Other Laws (Amendment) Bill, 2026, amending Section 10A of the Payment and Settlement Systems Act, 2007, on 4 August 2026 — removing the six-year-old statutory bar on charging a Merchant Discount Rate (MDR) on UPI and RuPay debit card transactions.
The Finance Ministry has clarified the amendment is an "enabling provision": it does not itself impose any charge, and UPI will remain free for individual users and person-to-person (P2P) transactions.
Any future MDR, if introduced, would be limited, threshold-based, and apply only to select merchant categories (not small merchants or consumers); the final rate structure and applicability will be decided later by the UPI and Services Steering Committee headed by the National Payments Corporation of India (NPCI).
The move follows sustained industry pressure — from banks and payment service providers who have borne UPI's processing costs without merchant-side revenue — as UPI's transaction volumes have scaled to a level where "zero-MDR" was seen as fiscally and commercially unsustainable for the ecosystem.
Unified Payments Interface (UPI) and the Payment and Settlement Systems Act, 2007
UPI is a real-time payment system developed by the National Payments Corporation of India (NPCI) that allows instant inter-bank transactions using a single mobile application and a Virtual Payment Address, without needing bank account/IFSC details for every transfer. It operates as an authorized payment system under the Payment and Settlement Systems Act, 2007 (PSS Act), which is the umbrella law empowering the Reserve Bank of India (RBI) to regulate and supervise all payment systems in India.
Key Details
- UPI was launched by NPCI in April 2016 (pilot) and went fully live in August 2016, under RBI's oversight.
- NPCI itself is a "not-for-profit" umbrella organisation for retail payments, set up in 2008 under Section 25 of the Companies Act, 1956 (now Section 8 of the Companies Act, 2013), with RBI and the Indian Banks' Association as promoters.
- Since January 2020, Section 10A of the PSS Act, 2007 (inserted via the Finance Act, 2019/effective 2020) had made MDR zero on UPI and RuPay debit card transactions, alongside a parallel provision under Section 269SU of the Income-tax Act, 1961 mandating large businesses to offer these modes without charging customers.
- The 2026 amendment removes this statutory zero-MDR prohibition, giving the Government the legal flexibility to permit MDR in the future, but requires a fresh notification/regulatory process before any charge actually applies.
The amendment is a pure legal/enabling change — it restores to the Government and regulator the authority (removed in 2020) to permit merchant fees on UPI, but the "who pays, how much" question is now shifted to a future NPCI-led regulatory decision.
Merchant Discount Rate (MDR) and Digital Payment Economics
MDR is the fee a merchant pays to their bank/payment service provider for processing a digital payment, typically expressed as a percentage of the transaction value; it compensates the payment ecosystem (issuing bank, acquiring bank, network operator) for infrastructure, fraud risk and processing costs.
Key Details
- Card networks (Visa, Mastercard, RuPay) and other digital payment modes typically charge MDR of roughly 0.4%-2% depending on the payment type and merchant category, which is why UPI's zero-MDR status made it commercially attractive relative to cards for small merchants.
- Zero MDR on UPI was originally intended to promote digital payment adoption and financial inclusion in the immediate aftermath of demonetisation-era push toward a "less-cash economy," and it succeeded in scaling UPI adoption to the world's largest real-time payment system by volume.
- However, zero MDR meant banks and payment service providers absorbed processing costs with no merchant-side revenue, which industry bodies argued was financially unsustainable at UPI's current transaction scale and discouraged private investment in payment infrastructure.
The core policy tension — free digital payments driving adoption versus sustainable economics for banks and fintechs processing them — is precisely what prompted this reversal of the zero-MDR mandate six years after it was introduced.
Digital Public Infrastructure (DPI) and Regulatory Institutions
UPI is India's flagship example of Digital Public Infrastructure (DPI) — open, interoperable digital systems (alongside Aadhaar and the Account Aggregator framework) that other private/public services can build upon, cited internationally (including at G20 forums) as a model for financial inclusion.
Key Details
- UPI processed approximately 241.6 billion transactions worth around ₹314.2 lakh crore in FY2025-26, a roughly 30% year-on-year jump in volume, making it the world's largest real-time retail payment system by transaction count.
- NPCI's UPI and Services Steering Committee will determine future MDR scope, reflecting how much operational discretion in India's digital payments regulation sits with NPCI (a company under RBI/IBA oversight) rather than directly with Parliament or RBI.
- RBI regulates payment systems broadly under the PSS Act, 2007, while NPCI operates the specific UPI rails — a two-tier structure (statutory regulator + operating entity) relevant to how India's DPI stack is governed.
The episode is a useful case study in DPI governance — how a law change at the Parliament level (PSS Act amendment) cascades down to an operational decision by a quasi-private, NPCI-led committee before actually affecting any merchant or consumer.
- UPI transaction volume, FY2025-26: approximately 241.6 billion transactions worth around ₹314.2 lakh crore (~30% YoY volume growth).
- Zero MDR on UPI in effect since: January 2020, under Section 10A of the PSS Act, 2007.
- Amending legislation: Taxation and Other Laws (Amendment) Bill, 2026, passed by Parliament on 4 August 2026.
- UPI launched: April 2016 (pilot), fully operational August 2016; developed by NPCI, established 2008.
- Regulatory body for future MDR decision: UPI and Services Steering Committee, headed by NPCI.