Lok Sabha passes Bill enabling government to allow MDR on UPI, digital payments

The Lok Sabha has passed a Bill amending the Payment and Settlement Systems Act, enabling the government to permit Merchant Discount Rate (MDR) on UPI and other notified digital payment modes. The amendment seeks to create a sustainable revenue model for payment service providers

New Delhi: Lok Sabha on Thursday passed a Bill to amend the Payment and Settlement Systems Act, 2007 that authorises the government to permit banks and other service providers to levy charges on payments through unified payments interface (UPI) and other notified electronic payment modes.

The amendment passed by the House without discussion amid din seeks to remove the existing legal provision that prevents banks and payment service providers from charging Merchant Discount Rate (MDR) on notified electronic payment modes.

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Real-time payments made through RTGS and NEFT are done by paying a service charge. However, UPI transactions have been exempted from such charges so far.

The proposed changes in Payment and Settlement Systems Act is a part of comprehensive legislation on taxation, which was introduced in the House on Tuesday.

The Bill was passed through voice vote in the Lok Sabha after the House resumed at 2 pm after the earlier adjournment.

As soon as the House re-assembled, Finance Minister Nirmala Sitharaman moved the Taxation and Other Laws (Amendment) Bill, 2026 further to amend the Payment and Settlement Systems Act, 2007 and the Income Tax Act, 2025, and to amend the Finance Act, 2026, to be taken into consideration.

The government’s approach aims to levy small charge on digital payment services for consumers and small businesses while ensuring a sustainable revenue model for banks, payment service providers (PSPs), and payment infrastructure firms that drive the digital payments ecosystem.

“In the Payment and Settlement Systems Act, 2007, in Section 10A, for the words, figures and letters ‘the electronic modes of payment prescribed under section 269SU of the Income-tax Act, 1961’, the words ‘one or more electronic modes of payment as the central government may, by notification, specify’ shall be substituted with effect from the date of publication of this Act in the Official Gazette,” the Bill said.

Section 10A of the Payment and Settlement Systems Act, 2007 prohibits banks and system providers from imposing any charges on electronic payments while Section 269SU of the Income Tax Act requires large businesses with a turnover exceeding Rs 50 crore to accept payments through specific electronic modes, including RuPay debit cards and BHIM-UPI QR codes.

As on date, no bank or payment system provider could impose any charge upon anyone, either directly or indirectly, for using the electronic modes of payment prescribed under Section 269SU of the Income Tax Act, 1961.

Speaking on the issue RBI Governor Sanjay Malhotra on Wednesday said it is “premature” to talk about MDR on payment through digital means.

Investment in public infrastructure like payments is necessary, he said, reiterating that someone will have to pay for it.

“The choices before us are simple: either the general public has to pay for it through taxes, or we have to levy the merchant discount rate (MDR), following the ‘user pays’ model.

“Right now the government is getting us the amendment. Costs have to be paid by someone. We all want this public infrastructure to strengthen and become more efficient, etc. We continue to do that. That is our focus right now; let us wait and watch for further developments,” Malhotra said.

Levy of MDR has become a vexed issue in the country as bankers and other stakeholders in the payment industry have been pressing for it, and the government has so far not moved in the matter, and the usage of digital payments like the UPI platform has continued to grow at a handsome pace.

Some watchers have been expecting MDR to set in for UPI transactions above a certain value between a merchant and customer, and not in the case of peer-to-peer payments.

The important aspect is that someone has to pay for the service, the RBI Governor said.

Malhotra said under the ‘use-pays’ principle, it is the person or the merchant who is transacting who gets charged through the levy of MDR, but added that even if there is no MDR in place, the general public pays for it through the taxes.

“What is important is that we continue to invest and continue to find the means, whether it is MDR or others. Let us wait and see how the situation evolves,” he said