India’s Parliament passes a comprehensive bill that unexpectedly reshapes digital payment fees and simplifies foreign investment rules, raising concerns about impacts on merchants and the long-term strategy for economic growth.
India’s Parliament this week approved a wide-ranging tax and payments law that does far more than tidy up compliance. Passed by the Lok Sabha on August 6 without debate amid opposition protest, the Taxation and Other Laws (Amendment) Bill, 2026 folds together changes to tax rules for foreign investors and a quiet but potentially far-reaching rewrite of the legal basis for zero-fee UPI payments.
The Bill, introduced by Finance Minister Nirmala Sitharaman just two days earlier, replaces an ordinance issued on June 5 and amends three laws at once, including the Payment and Settlement Systems Act, 2007. Supporters say it is meant to provide tax certainty, attract capital and simplify a system the government says must adapt to changing global trade conditions. Critics argue that the scale of the changes warranted fuller scrutiny than a voice vote and that the legislation bundles together two unrelated policy aims: courting overseas capital and reshaping the economics of retail digital payments.
The most immediate issue for ordinary users is UPI. Since January 2020, the law has kept the merchant discount rate, or MDR, at zero for UPI and RuPay debit transactions, shielding merchants from charges on digital payments. The new Bill removes that fixed protection and allows the central government to notify which digital payment methods remain free and which may later carry charges. Sitharaman has rejected suggestions that customers would be charged directly, saying MDR applies to merchants, not users, and that any rate would be set later by an NPCI-led committee. Even so, economists and payments industry groups say merchant fees are rarely invisible for long and can reappear through higher prices, minimum spending rules or a preference for cash.
That concern is amplified by the scale of UPI’s rise. Government data show the system handled 24,161.69 crore transactions worth Rs 314.23 lakh crore in FY26, up from Rs 84.16 lakh crore four years earlier, with 55.49 crore users onboarded by June 2026. The state has also spent heavily to keep the system running without MDR, with incentives for banks and the National Payments Corporation of India rising from Rs 1,389 crore in 2021-22 to Rs 3,631 crore in 2023-24. The Payments Council of India has argued that the subsidy model is becoming harder to sustain and has urged the government to revisit zero MDR, while warning that any new charge could fall most heavily on the small merchants that make up the bulk of digital acceptors.
The other half of the Bill is aimed squarely at foreign money. It cuts the conditions for relocating fund managers to India from 13 to five, a move likely to help long-running ambitions for GIFT City, and removes some notification requirements for foreign companies using Indian-owned data centres. It also extends exemptions to foreign electronics and diamond-trade firms. The most striking provision gives foreign companies storing electronic components in customs-bonded warehouses a 15-year tax exemption through 2041 before they supply Indian contract manufacturers, a signal that New Delhi wants to lock in long-term investment in electronics supply chains.
That preference for stability is also visible in the June ordinance that the Bill formalises. According to explanations published by tax and market commentary services, the measure exempts foreign institutional and portfolio investors, along with the Bank for International Settlements, from tax on interest and capital gains from government securities, effective from April 1, 2026. The government’s aim is to draw more global capital and improve liquidity in the debt market. Together, the measures suggest a policy strategy built around making India more attractive to international investors and manufacturers. The sharper question raised by critics is whether ordinary merchants, who helped make UPI a national habit, were given the same level of legislative certainty as foreign capital.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
