The Taxation and Other Laws (Amendment) Bill, 2026, passed by the Lok Sabha, does not itself impose a Merchant Discount Rate on UPI or RuPay debit card transactions. Instead, it removes the statutory bar that has kept those transactions fee-free since January 2020, creating an enabling framework for the government or regulator to prescribe MDR in the future through subordinate measures, legal experts say.
The amendment delinks Section 10A of the Payment and Settlement Systems Act from Section 269SU of the Income-tax Act, shifting the power to decide which payment modes remain free from a fixed statutory rule to executive discretion via gazette notification. This means the government can change the policy in future without needing another act of Parliament.
“By itself, the Bill does not impose a Merchant Discount Rate. It removes the statutory prohibition that prevented MDR from being levied on UPI and RuPay debit card transactions,” said Shiv Sapra, partner at Kochhar & Co. “In other words, it creates an enabling framework for the government or the regulator to prescribe MDR in the future through subordinate measures.”
Who should bear the cost?
While the Payments Council of India has sought to clear the air by saying consumers and small merchants will continue to use UPI without transaction charges, the question of who ultimately bears the cost remains unresolved.The Finance Ministry clarified that UPI will remain free for consumers and that the vast majority of merchant transactions will continue to carry no charges. Any future MDR, if introduced, would apply only to “a limited set of merchant transactions above a specified threshold and at a nominal rate, which would be lower than typical debit and credit card MDRs”.
The Ministry added that MDR, if introduced, would be “threshold-based and not levied on a blanket basis to all,” and that the actual framework would be decided by the NPCI-led UPI and Services Steering Committee, followed by a Gazette notification and RBI guidelines.
Reports suggest that an MDR of 0.25% to 0.5% on UPI transactions above INR 2,000 made to businesses is under consideration, with person-to-person transfers expected to remain exempt. However, the Finance Ministry has clarified that no final decision has been taken, and the Steering Committee will decide on the MDR, if any, only after Parliament passes the Taxation and Other Laws (Amendment) Bill, 2026.
Anu Tiwari, head – fintech & financial service regulatory & senior director, Cyril Amarchand Mangaldas, Singapore, said the debate is likely to shift from “Should MDR exist?” to “Who should bear the cost?”, the government through subsidies, merchants through MDR, or consumers indirectly through higher prices.
“That policy choice will determine whether India can maintain both the scale and sustainability of its digital payments revolution,” Tiwari said.
He described the move as positive, noting that MDR on retail payment rails will incentivise better services and benefit Indian and global fintechs, being in line with similar global networks. “This is also aligned with directional statements made by the RBI recently,” he said.
“Basis precedents, introduction of similar charges / MDR has expanded the pie, introducing more customers, rather shrink it,” Tiwari added.
“The real legal question is no longer whether MDR can be charged, but how it will be designed,” Sapra said. “The eventual rules will have to strike a balance between the sustainability of the payments ecosystem, merchant competitiveness, consumer protection and India’s broader digital public infrastructure objectives.”
Market structure concerns
The Parliamentary Standing Committee on Finance, in its 32nd Report tabled in March 2026, explicitly flagged that the “absence of MDR makes the UPI ecosystem financially unsustainable,” a submission from the Department of Financial Services that fed directly into this legislative push. The Committee noted that current government incentives cover only 11% of the industry’s actual costs and about 14% of the MDR that would otherwise have been collected.
Between FY2021-22 and FY2024-25, the Centre provided around INR 8,730 crore in incentives to support the UPI ecosystem, but with UPI processing 23.6 billion transactions worth INR 29.9 lakh crore in July alone, the scale of infrastructure now being operated at zero MDR has become difficult for the exchequer to keep subsidising indefinitely.
The prospect of MDR being levied at least on large merchants has triggered competition-law concerns as MDR revenue would likely flow disproportionately to the largest acquiring banks and payment aggregators that already dominate UPI’s merchant-acquiring side, reintroducing it risks entrenching incumbents’ market power at the expense of smaller third-party app providers (TPAPs) and payment aggregators, who lack the scale to negotiate favourable MDR-sharing arrangements or absorb compliance costs.
“Any threshold-based MDR regime will have to be designed carefully because UPI is already a highly concentrated market. If the bulk of new MDR revenue flows to the largest TPAPs, it could strengthen the same network effects, merchant relationships, data advantages and cashback capacity that make it difficult for smaller players to compete. The concern is also structural because UPI operates through a layered intermediary ecosystem involving TPAPs, PSP banks, banks, payment aggregators and merchant-facing entities. Therefore, MDR design should not only address consumer cost, but also ensure fair revenue allocation across intermediaries,” said Soumya Singh, co-founding partner, Thistle&Law.
