India Bill Opens Path to UPI Merchant Fees

India's government has proposed changes to the Payment and Settlement Systems Act (PSSA), 2007, that could allow merchant discount rates (MDR) to be charged on UPI transactions for the first time in nearly six years. The amendment, bundled inside the Taxation and Other Laws (Amendment) Bill, 2026, is expected to be tabled in Parliament on August 5, 2026.

Right now, Section 10A of the PSSA flatly bans banks and payment system providers from charging any fee, direct or indirect, on UPI payments. The proposed amendment replaces that blanket ban with a narrower one. Instead of exempting all payment modes listed under Section 269SU of the Income Tax Act from MDR, the revised text lets the Central Government directly notify, by gazette notification, which electronic payment modes remain MDR-free. Modes not on that list would no longer be protected by law.

Critically, the Bill does not name any payment method that will face charges, nor does it fix any rate. It hands the executive a surgical tool: the ability to carve out specific payment types or transaction categories from the zero-MDR umbrella without going back to Parliament each time.

Why This Matters for Payments and Fintech

The structural shift is significant. By dropping the reference to Section 269SU of the Income Tax Act, the pricing decision moves away from a tax statute and sits closer to direct regulatory control. An industry source cited in the reporting suggests this effectively places MDR pricing under the purview of the Reserve Bank of India, which already regulates payment system operators. That would give the RBI flexibility to set or approve rates in consultation with the government, rather than requiring legislative action every time the policy needs adjustment.

Pine Labs co-founder and CEO Amrish Rau publicly welcomed the move. He argued that the zero-MDR regime over the past six years had slowed ecosystem investment, even as infrastructure costs climbed roughly 300% over the last 12 to 24 months. Pointing to Brazil's PIX and China's real-time payment networks, which charge MDR of 30 to 40 basis points, Rau noted both countries have reached over 90% digital payments penetration among users and merchants. India, by his estimate, is currently at 35 to 40%.

His argument: without some fee recovery, fintechs, banks, and startups cannot fund the IT investment, innovation, and cybersecurity spending needed to push UPI's reach further, and potentially take UPI cross-border. He also said person-to-person transfers and consumer-facing charges should stay at zero regardless of what happens to merchant-side MDR.

What the MDR Proposal Could Look Like in Practice

Earlier reporting indicated the government was weighing a targeted MDR structure: businesses with annual turnover of Rs 1 crore to Rs 1.5 crore or more could face an MDR of 0.05% to 0.07% on UPI transactions above Rs 2,000. That would limit the fee burden to larger merchants and higher-value transactions, leaving small shops and everyday consumer payments untouched.

This selective approach would also address a longstanding concern in the payments industry. The Union Budget for FY27 allocated Rs 2,000 crore to incentivise digital payments, but industry players had pushed for substantially larger subsidies. A targeted MDR could partially replace those government payouts with a market-based cost recovery mechanism, reducing the fiscal burden while giving payment infrastructure operators a sustainable revenue stream.

The backdrop is a UPI network that is growing fast regardless. NPCI data shows UPI processed 2,366 crore transactions in July 2026, up 4% from 2,272 crore in June. Total transaction value rose 3% to Rs 29.88 lakh crore in July from Rs 28.92 lakh crore the previous month. That scale is exactly what makes the MDR debate commercially relevant: even a fraction of a percent on a multi-lakh crore monthly flow generates meaningful revenue for the ecosystem.

For merchants, the immediate question is which turnover or transaction thresholds end up in the government's notification. For fintechs and payment aggregators, the amendment is a green light to plan for revenue models that have been off the table since 2020. For consumers, the key assurance being floated by industry is that P2P transfers stay free. Whether that assurance makes it into formal policy is the detail to watch as the Bill moves through Parliament.