Govt looks to bring back merchant fee on UPI transactions

Published 3 August 2026 · local

Mumbai: The finance ministry has proposed amendments to the Payment and Settlement Systems Act, 2007, that could pave the way for the return of merchant

Mumbai: The finance ministry has proposed amendments to the Payment and Settlement Systems Act, 2007, that could pave the way for the return of merchant discount rate (MDR) on unified payments interface (UPI) transactions. The changes, which are unlikely to burden UPI users, would give government the flexibility to levy merchant charges on notified digital payment modes, as it seeks a sustainable funding model for the platform's next phase of growth. Finance minister Nirmala Sitharaman will introduce the Taxation and Other Laws (Amendment) Bill, 2026 in Lok Sabha on Tuesday, seeking amendments to the payment and settlement systems law, the Income-Tax Act, 2025, and the Finance Act, 2026, according to the list of business for the Lower House. The amendment on payment and settlement systems proposes to scrap the provision under Section 10A that currently bars banks and payment system providers (PSPs) from levying MDR on transactions done through any electronic mode of payment. Also Read | MobiKwik CFO Taku calls for MDR on UPI transactions MDR is a fee that businesses pay to banks and PSPs for processing digital transactions. The government currently subsidizes part of the cost incurred by such players. “In clause 2 of the Bill, in the Payment and Settlement Systems Act, 2007, amendment of section 10A in order to remove the reference of provision of Income-Tax Act and also to provide that no bank or system provider shall impose, whether directly or indirectly, any charge upon a person making or receiving a payment by using one or more electronic modes of payment as may be notified by the central government,” said the amendment note seen by Mint.

Power to fix fees The Bill will allow the government to decide which digital payment methods may attract fees. The government is expected to notify the rate of MDR and the type of transactions it can be levied on, once the bill has been approved. Reports had earlier suggested that MDR may only be applicable on large value or large merchant transactions. The Bill does not detail any fees, rates or a timeline for any specific payment instrument. It also does not propose any fee for consumers using UPI, which means the burden of MDR would fall on merchants. The government had banned MDR on UPI and RuPay debit card transactions from January 2020 to accelerate digital payments and promote home-grown payment systems. The move by the finance ministry comes after a Parliamentary Standing Committee on Finance, in a March 2026 report, called for a “sustainable funding mechanism” for UPI, saying that the zero-MDR framework is financially unsustainable in the long run. Also Read | Google Pay integrates Gemini AI into app, expands credit push The panel had noted that UPI has the potential to grow ten-fold over the coming years, estimating that the platform has the ability to add 600 million users and process 100-150 billion transactions every month. It said this would require investments in technology, resilience and merchant acceptance infrastructure, which cannot be supported only by government incentives, and that the absence of a viable revenue stream had constrained banks and PSPs from investing in innovation, cybersecurity and infrastructure needed to support the next phase of UPI growth.