India's FY27 budget sets aside ₹2,000 crore for UPI merchant incentives. MDR on UPI would need a separate government notification, Khaitan & Co partner says.
The Finance Ministry tabled the Taxation and Other Laws (Amendment) Bill, 2026, on Tuesday, a draft that amends the Payment and Settlement Systems Act. The move triggered fresh speculation that UPI could start carrying charges. Legal opinion runs the other way: the zero-MDR regime for UPI stays in force.
Merchant discount rate is the fee banks and payment processors collect from merchants on card transactions, usually 0.25% to 1% of the value on debit cards and 1% to 3% on credit cards. The fee pays banks and payment service providers for processing and infrastructure. UPI carries no MDR today; banks and PSPs absorb that cost, and the government partially reimburses them for person-to-merchant (P2M) payments under ₹2,000 at small merchants. Visa and Mastercard collect their share of card MDR on their own networks; Mastercard carries an Alpha Score of 71, labeled Moderate, on its MA stock page.
The amendment rewires section 10A of the Payment and Settlement Systems Act, which bars banks and PSPs from imposing charges on specified electronic payment modes. Those modes are named by cross-reference to section 269SU of the Income-tax Act, 1961, read with rule 119AA of the Income-tax Rules, 1962: RuPay debit cards and UPI (standard and QR-code). Repeal of the 1961 Act forced the rewrite; its replacement, the Income-tax Act, 2025, is already in force. The government chose not to repoint the PSS Act at the new code's parallel provisions, section 187 and rule 133. It plans to drop the tax-law link entirely and let a Finance Ministry notification name the exempt modes.
Which modes stay free then moves from statute to gazette notice.
Two readings of the bill are circulating. One treats the change as housekeeping, a cleanup that keeps the zero-charge ban operative after repeal of the old tax law. The other sees the notification route as a mechanism that could later narrow the exempt list. Payments industry players and the Lok Sabha Standing Committee on Finance have both called the status quo unsustainable and asked for MDR on UPI.
Smita Jha, a partner at Khaitan & Co, called the amendment a consequential legislative measure. It preserves the operative force of the existing zero-MDR ban, she said, and creates no new legal basis for levying UPI charges. Any introduction of UPI MDR would require an independent policy action by the central government through a separate notification, she said.
The government's own budget numbers show the price of the current arrangement. For FY27 it set aside ₹2,000 crore to compensate banks and PSPs for small-merchant P2M payments, against ₹2,196 crore in FY26 and ₹1,923 crore in FY25. The reimbursement covers only a slice of P2M volume; the rest of the cost sits with banks and payment processors. NPCI, which owns and runs UPI, spent ₹2,270 crore in revenue expenditure and ₹742 crore in capital expenditure in FY25, the latest year for which financials are available.
Consumers can reasonably expect not to be billed directly, even under a hypothetical fee regime. Card payments already work that way: the merchant bears the MDR, and a future UPI fee could exclude small merchants or be priced below card MDR to protect adoption. The consumer exposure is indirect. Merchants respond to added costs by inflating prices, which is how a fee reaches the consumer.
The bill as introduced is not the notification that would bring UPI fees into existence. An instrument like that, if it ever arrives, is a separate policy decision by the central government. Tuesday's amendment, on Jha's reading, does not begin that process.
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