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A historic and major policy change has been implemented at the legal level in the Unified Payments Interface (UPI) and electronic transaction system, which has become the country’s most popular lifeline in the field of digital payments. President Draupadi Murmu has given his formal assent to the ‘Taxation and Other Laws (Amendment) Act, 2026’ and the ‘Payment and Settlement Systems Act, 2007 (Amendment)’ after they were passed by both Houses of Parliament. This law has become effective in the entire country with the issuance of gazette notification by the Law Ministry. This new law has given the government the statutory power by amending Section 10A of the Payment and Settlement Systems Act to allow banks and payment service providers (PSPs) to levy a fee i.e. Merchant Discount Rate (MDR) on notified digital transactions. After this legislative step, the debate intensified whether crores of common citizens of the country will now have to empty their pockets for digital transactions.
UPI will be completely free for common consumers: Government’s clear stance
Putting an end to the questions and concerns arising after the passage of the bill and the President’s assent, the Central Government and the Finance Ministry have made the situation 100% clear. Union Finance Minister Nirmala Sitharaman has reiterated in Parliament and public forums that payments through UPI for retail consumers will remain completely free as before. That is, if a common person sends money to his friend or relative (P2P – Person to Person) or goes to a shop and scans the QR code to buy everyday goods (P2M – Person to Merchant), then no additional fee or surcharge of any kind will be charged from him. The government has made it clear that the basic premise of Digital India is to digitally empower the general public, hence there will be no compromise on the policy of keeping the general transactions of retail users free.
What changed in MDR and zero-MDR system?
According to the rules in force till now, the government had made ‘Zero MDR’ mandatory on transactions done through UPI and RuPay debit cards, due to which banks and fintech companies did not get any service charge for processing the transactions. Merchant Discount Rate (MDR) is the fee that a merchant or institution pays to payment gateways, banks and service providers in exchange for the technical facility to accept money through digital medium. Through the new amendment, the government has made that strict legal obligation flexible. Now the Central Government can issue an official notification to decide which categories of transactions will remain completely fee-free and on which special or large business transactions service providers will be allowed to charge nominal fees.
Who can be charged? Offering large merchants and high value transactions
As per the proposed rules and policy discussions, the idea of imposing charges may be limited only to large corporates and high turnover traders.
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Small traders and shopkeepers completely out: No fee will be applicable on tea-snack stalls, vegetable vendors, ration grocery stores and small shopkeepers (whose annual turnover is less than a certain limit).
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Limited rates at major merchants: A proposal to levy a nominal MDR of 0.3% to 0.5% on large retail outlets, malls, e-commerce companies and corporate merchants with an annual turnover of more than ₹1.5 crore accepting transactions worth more than ₹2,000 is under consideration.
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The final decision will be taken by the committee of NPCI: The ‘UPI and Services Steering Committee’ functioning under the National Payments Corporation of India (NPCI) will finalize the applicable rates and categories after consultation with all stakeholders.
Solving the rising costs of digital infrastructure and cyber security
The scale of the UPI network in India has grown at an extraordinary pace and billions of transactions are being successfully processed on the platform every month. Operating this massive system around the clock without any server downtime requires continued heavy capital investment in increasing server capacity, setting up advanced data centers and modern cyber security and fraud prevention systems. This has been a long-standing demand of banks and fintech companies as they are facing financial pressure on maintaining this system due to the zero revenue model. The Reserve Bank of India (RBI) has also underlined from time to time that a sustainable revenue model is essential for the long-term stability and resilience of the payments system. The financial framework provided by the new law will enable banks to invest in advanced technology and artificial intelligence based security mechanisms.
Foreign investment and data centers will also get new incentives
In this comprehensive taxation amendment law approved by the President, many important provisions have been made not only to promote digital payments but also to promote foreign capital and domestic manufacturing. Under this, legislative approval has been given to foreign portfolio investors (FPIs) for tax concessions on capital gains and interest income from investments in government securities (G-Secs). Additionally, procedures for using Indian data centers by foreign cloud companies have been simplified and avenues have been opened to accelerate domestic electronics manufacturing by providing tax exemptions to foreign companies storing electronic components in Custom Bonded Areas. This comprehensive reform is a strategic step towards making the country the strongest hub of global manufacturing and digital economy.