India’s Parliament has approved a legal change that gives the central government more direct control over which electronic payment modes receive statutory protection from transaction charges. The change does not itself impose a fee on Unified Payments Interface transactions, and Finance Minister Nirmala Sitharaman said consumers will continue to use UPI without a transaction charge. But it moves a consequential decision out of a fixed cross-reference in tax law and into future government notifications.
That distinction matters for merchants, banks, payment service providers and the National Payments Corporation of India, which operates UPI. The immediate consumer promise is clear. The longer-term treatment of merchant discount rates, or MDR, is not. Sitharaman said no MDR framework has been finalised and described the amendment as an enabling provision.
What Parliament changed
Section 10A of India’s Payment and Settlement Systems Act bars a bank or payment-system provider from directly or indirectly charging a person who makes or receives a payment using specified electronic modes. Before the amendment, the protected modes were those prescribed under Section 269SU of the Income-tax Act, 1961.
The Taxation and Other Laws (Amendment) Bill, 2026 replaces that reference. Once the measure takes effect after publication in the Official Gazette, the no-charge rule will instead apply to one or more electronic payment modes that the central government may specify by notification.
The wording retains a legal mechanism for protecting payment users from charges. It also gives the government discretion over the list of protected modes. That means the commercial effect will depend on future notifications: which payment types are included, whether distinctions are made between transaction classes, and how any thresholds or merchant categories are defined.
Parliament passed the measure on August 10 after the Rajya Sabha approved it. The original bill text was introduced on August 4 and also contains unrelated tax provisions. Its memorandum says the payment-law amendment is intended to remove the reference to the old income-tax provision while continuing to bar banks and system providers from charging people who make or receive payments through government-notified modes.
A consumer guarantee does not settle merchant economics
During the Rajya Sabha debate, Sitharaman said consumers would not be charged for UPI transactions and that no MDR framework had yet been finalised, according to The New Indian Express. She said any future MDR would apply only to a limited category of merchant transactions above a prescribed threshold.
Those assurances narrow the immediate risk to consumers, but they do not amount to a completed merchant-pricing policy. MDR is ordinarily an acceptance cost borne within the merchant side of a payment transaction, while a direct consumer fee is a separate charge. It is therefore possible to preserve free consumer use while changing the economics for some merchants.
Any future framework will need to answer practical questions that the statutory amendment does not resolve. These include whether protections differ by merchant size, transaction value, payment instrument or UPI use case; who receives any fee revenue; whether merchants may pass costs through; and how exemptions would be monitored. A threshold-based system would also create classification and anti-avoidance questions for acquirers and payment aggregators.
Sitharaman said the UPI and Services Steering Committee, headed by NPCI, would consider whether MDR should be introduced and, if so, its scope and structure. That places important policy design work with institutions that must balance adoption, infrastructure funding, competition and merchant cost.
Why the zero-fee model is under pressure
UPI’s zero-MDR policy helped make account-to-account payments easy for merchants to accept at scale. It reduced a major adoption barrier, particularly for small businesses using QR codes. But the same policy limits transaction-based revenue for banks, payment apps, acquirers and technology providers that support the system.
PaymentsJournal, citing Reuters and industry analysis, reported that some market participants view merchant fees as a possible way to fund infrastructure, security and product development. That is an argument about system economics, not evidence that a particular fee level is necessary or that providers would direct new revenue to those purposes.
The accountability issue is therefore not simply whether UPI should remain free. It is who decides, under what criteria, with what evidence and with which safeguards for merchants that have built their checkout processes around zero-MDR acceptance. Moving the protected list to government notifications can make policy easier to update, but it also makes the notification process itself the critical control point.
Controls the industry should expect
A credible MDR proposal would need more than a broad promise that consumers will not pay. Payment providers and merchants should expect a published impact assessment, clear definitions, implementation lead time and a transparent account of how revenue would be distributed across the acceptance chain.
For smaller merchants, the central risks are margin pressure, confusing eligibility rules and unexpected deductions by intermediaries. For larger merchants, the questions include whether UPI remains cheaper than cards, whether fees vary by transaction type and whether payment routing or tender-steering practices change. For payment companies, a selective fee regime would require reliable merchant classification, billing controls, dispute processes and auditable application of exemptions.
Regulators will also need to guard against indirect charging that circumvents the statutory prohibition. Section 10A expressly covers charges imposed directly or indirectly. If certain UPI transactions remain protected by notification, contractual labels should not be used to recreate the prohibited fee through another line item.
The law has created flexibility, not a settled price. Until the government issues notifications and any MDR framework is formally adopted, claims that India has already restored UPI merchant fees go too far. The material development is that Parliament has changed who controls the boundary of the no-charge rule—and the next decisions will determine whether that boundary continues to cover all UPI merchant payments or only part of them.