Lok Sabha Clears Bill Enabling Government to Authorise Charges on UPI Transactions
The Lok Sabha on Thursday passed the Taxation and Other Laws (Amendment) Bill, 2026, which empowers the central government to permit banks and payment service providers to introduce charges on transactions conducted via the Unified Payments Interface (UPI) and other notified digital payment channels.
What Happened
The legislation amends the Payment and Settlement Systems Act, 2007, alongside provisions in the Income Tax Act, 2025, and the Finance Act, 2026. Moved by Finance Minister Nirmala Sitharaman, the Bill was passed by a voice vote without a debate following persistent sloganeering from the Opposition.
Previously, Section 10A of the Payment and Settlement Systems Act, 2007, barred banks and payment system providers from imposing any Merchant Discount Rate (MDR) or other service charges on electronic payment modes prescribed under Section 269SU of the Income-tax Act, including BHIM-UPI QR codes and RuPay debit cards. The new amendment modifies Section 10A to state that the prohibition will apply only to ‘one or more electronic modes of payment as the central government may, by notification, specify’ once published in the Official Gazette.
Key Highlights
- Enabling UPI Charges: The amendment removes the blanket legal prohibition on levying charges for notified electronic payment modes, granting the central government the power to permit charges on UPI.
- Ecosystem Sustainability: The government’s stated objective is to introduce small charges on digital payments for consumers and small businesses to create a sustainable revenue framework for banks, payment service providers, and infrastructure entities.
- Taxation and Manufacturing Incentives: The Bill extends income tax exemptions until 2040-41 for foreign companies engaging domestic contract manufacturers for electronics such as mobile phones, laptops, tablets, personal computers, and servers.
- Component Warehousing Relief: A 15-year income tax exemption till 2040-41 is established for foreign firms storing components in customs warehouses to supply Indian contract manufacturers.
- Investment Reforms: The Bill replaces the June 5 ordinance providing tax exemptions on interest and capital gains from G-Sec investments by Foreign Portfolio Investors (FPIs), eases relocation norms for fund managers, and simplifies regulations for foreign cloud companies operating in Indian data centres.
Why This Matters
While electronic funds transfers such as RTGS and NEFT carry service charges, UPI transactions have historically remained free for users under existing statutory exemptions. Commercial banks and payment industry participants have consistently advocated for the reintroduction of MDR to support investments in digital payment networks. According to RBI Governor Sanjay Malhotra, who commented ahead of the passage, public infrastructure requires investment and someone ultimately has to pay for it, though he noted that discussions on MDR remained premature at that stage.
What to Watch Next
The changes to the Payment and Settlement Systems Act, 2007, will take effect following the publication of the Act in the Official Gazette. Next steps will depend on notifications issued by the central government specifying which payment modes will be subject to charges and what fee structures will apply.
Frequently Asked Questions
What does the new amendment change regarding UPI?
The amendment modifies Section 10A of the Payment and Settlement Systems Act, 2007, allowing the central government the legal authority to notify which digital payment modes can be charged, thereby removing the absolute statutory ban on UPI fees.
Why was the legislation introduced?
The government aims to balance low charges for consumers and small merchants with a viable revenue stream for banks, payment service providers, and digital infrastructure firms.
What other major measures are in the Bill?
The Bill includes long-term tax exemptions up to 2040-41 for domestic electronic hardware manufacturing, eased criteria for foreign fund managers relocating to India, and tax exemptions on foreign portfolio investments in government securities.
Source: Based on parliamentary proceedings reported by The Hindu.