The Lok Sabha has passed amendments to the Payment and Settlement Systems (PSS) Act, 2007, giving the Central Government the legal authority to permit fees on Unified Payments Interface (UPI) and other notified digital payment methods. The legislation does not immediately impose charges, but creates the legal framework for the government to introduce Merchant Discount Rate (MDR) or other transaction fees through future notifications. Any fee structure, including the transactions covered and the applicable rates, will be decided separately by the government after the Bill becomes law.
The move marks a significant policy shift after several years of the zero-MDR regime introduced in 2020 to accelerate digital payments. Industry participants, including banks and fintech firms, have argued that the current model is financially unsustainable because payment service providers bear infrastructure, cybersecurity, and processing costs without earning revenue from UPI transactions. The amendments aim to provide flexibility for creating a more sustainable digital payments ecosystem while allowing the government to protect small users and merchants through targeted exemptions.
Lok Sabha Approves Amendments to Digital Payments Law
The Bill amends the Payment and Settlement Systems Act by removing the existing statutory prohibition that effectively kept certain notified digital payment modes free of merchant charges.
Instead, it empowers the Central Government to:
- Notify which digital payment methods may attract fees.
- Decide the applicable Merchant Discount Rate (MDR) or other charges.
- Specify the categories of transactions and merchants covered.
- Modify or exempt payment modes through future notifications.
Bill Snapshot
| Item | Details |
|---|---|
| Legislation | Payment and Settlement Systems (Amendment) Bill, 2026 |
| Passed By | Lok Sabha |
| Key Change | Enables government to authorize fees on notified digital payment methods |
| Immediate UPI Charges | No |
| Fee Structure | To be notified separately by the government |
What Is Merchant Discount Rate (MDR)?
Merchant Discount Rate (MDR) is the fee paid by merchants to banks and payment service providers for processing digital transactions.
Currently:
- UPI transactions generally attract zero MDR.
- Credit card transactions usually carry MDR.
- Debit card transactions also attract MDR within prescribed limits.
If introduced for UPI, the MDR would generally be paid by merchants rather than consumers, although businesses could indirectly factor the cost into pricing decisions.
No Charges Have Been Announced Yet
Although Parliament has approved the legal framework, the government has not announced any final fee structure.
According to reports, policymakers are considering options such as:
- Applying MDR only to high-value UPI transactions.
- Charging only large merchants above a specified annual turnover.
- Continuing to keep small merchants and low-value transactions free.
One proposal under discussion would apply an MDR of 0.3%–0.5% on UPI transactions above ₹2,000 for merchants with annual turnover exceeding ₹1.5 crore, though no final decision has been taken.
Possible Framework Under Consideration
| Area | Current Position |
|---|---|
| Consumer UPI Payments | No change announced |
| Small Merchants | Likely to remain exempt (under proposals) |
| Large Merchants | Could face MDR if notified |
| Final Rates | Yet to be announced |
Why the Government Is Considering the Change
Industry stakeholders have long argued that the zero-MDR regime has placed increasing financial pressure on:
- Banks.
- Payment service providers.
- Fintech companies.
- Digital payment infrastructure operators.
As UPI transaction volumes continue to grow rapidly, maintaining payment infrastructure, fraud prevention systems, cybersecurity, and innovation requires substantial investment. Allowing merchant charges could help create a sustainable revenue model for the digital payments ecosystem.
What Happens Next?
The Bill must complete the remaining legislative process before becoming law. Even after that:
- The government will decide whether to introduce any charges.
- Separate notifications will specify applicable payment modes.
- MDR rates, thresholds, exemptions, and implementation timelines will be announced later.
Until such notifications are issued, UPI transactions remain under the existing framework, and no new merchant charges automatically take effect.
Looking Ahead
The Lok Sabha’s approval of amendments to the Payment and Settlement Systems Act represents an important policy shift in India’s digital payments landscape. Rather than immediately reintroducing charges, the legislation provides the government with the flexibility to authorize fees on UPI and other digital payment methods in the future. This approach is intended to balance two competing priorities: maintaining the affordability and widespread adoption of digital payments while ensuring that banks and payment service providers have a sustainable revenue model to support continued investment in payment infrastructure and innovation.
Looking ahead, the focus will be on the government’s implementing notifications, which will determine whether merchant fees are introduced, which transactions are covered, and whether exemptions are provided for small businesses and low-value payments. Any final framework is expected to have significant implications for merchants, fintech companies, banks, and India’s rapidly expanding digital payments ecosystem.
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