A proposed amendment would let the government authorise charges of up to 0.5% on some UPI transactions, raising fears that a system built on free payments could be gradually turned into a source of revenue.
India’s government is edging towards a significant reversal in payments policy, opening the door to charges on a system it spent years trying to expand. According to The Hindu, the Taxation and Other Laws (Amendment) Bill, 2026 would change Section 10A of the Payment and Settlement Systems Act, 2007 so the state can notify charges on selected electronic payment methods. The proposal would allow a merchant discount rate, or MDR, of 0.25% to 0.5% on UPI transactions above ₹2,000, affecting only a small share of payments by volume but a far larger share by value. That combination makes the move more consequential than its limited transaction count might suggest.
The legal change matters because Section 10A, as set out in the amended Act, currently bars banks and system providers from levying charges on electronic payment modes that have been notified under the relevant tax rules. That prohibition was strengthened through a 2019 amendment and has helped keep UPI free at the point of use. Commentary from legal and policy specialists on the 2026 bill says the new wording would not itself impose a fee on users immediately, but would give the government the power to identify payment modes that could be charged in future.
That is why critics see more than a technical adjustment. The payment system has been central to India’s push away from cash since demonetisation in 2016, and UPI quickly became the main channel for that shift. Industry data and policy analysis have long treated zero merchant charges as a deliberate subsidy designed to build adoption and network effects. The worry now is that introducing a charge, even on higher-value transactions, could weaken the incentive for merchants and consumers to continue using the rail that has become the backbone of digital payments.
The economics are also more complicated than a simple levy on merchants. In two-sided payment markets, the formal payer is not always the one who ends up bearing the cost. Banks, payment service providers and merchants may all absorb part of it, depending on competition and bargaining power. If the charge cannot be fully passed on, the burden may instead fall on the institutions that maintain the system, potentially reducing their appetite to invest in reliability, fraud prevention and wider access. That would sit uneasily alongside the government’s own stated interest in expanding digital payments and keeping transactions traceable.
There is also a broader policy concern. India has already chosen to tax some payment-related activity, including credit card charges and interest, in ways that many other jurisdictions do not. Extending similar logic to UPI could reinforce a pattern of treating convenient payment rails as revenue sources rather than public infrastructure. Once the legal route exists, even a limited levy can be expanded later. That is why the larger issue is not simply whether the proposed MDR is small, but whether the state wants to preserve the incentive structure that helped turn UPI into a mass-market payment habit.
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