Almost every Indian adult now pays for something by scanning a QR code. Almost none of them pay a fee to do it, and neither does the shopkeeper on the other side of the counter. That is not an accident of the market. It is the result of a specific sentence sitting in a specific Act of Parliament since 2019, which makes it illegal for a bank to charge anyone for a UPI transaction. Not anymore.

On 4 August 2026, the Government introduced a Bill to replace that sentence. The amendment runs to four lines and sits inside a tax Bill. The Lok Sabha passed it two days later without discussion.

Nothing costs anything more today. But the legal position that kept UPI free has changed, and the change has been reported in several different and inconsistent ways. What follows sets out what the amendment does, what it does not do, and what the arguments on either side actually are.

1. What has actually happened?

On 4 August 2026, the Finance Minister introduced the Taxation and Other Laws (Amendment) Bill, 2026 in the Lok Sabha. [1] A Bill is a proposed law. It becomes law only after both Houses of Parliament pass it and the President signs it.

On its face this is an ordinary tax statute. Most of it hands out income-tax exemptions: to foreign investment funds, to overseas investors in government bonds, to companies that make electronics in India, and to the rough-diamond trade. [2]

But Chapter II of the Bill contains a single clause, running to four lines, that has nothing to do with tax. Clause 2 amends Section 10A of the Payment and Settlement Systems Act, 2007. That is the provision which has, since January 2020, made it unlawful for any bank or payment company to charge anybody for a UPI or RuPay debit card transaction. [1]

The Lok Sabha passed the Bill on 6 August 2026 by voice vote, without discussion, while Opposition members were protesting about an unrelated matter. [3] A voice vote means the Speaker judges the result from the volume of the “ayes” and the “noes”. No count is taken and no record is kept of how any individual voted. The Bill is now before the Rajya Sabha.

Two points are being reported inconsistently, and both are worth settling at the outset:

The Bill does not impose a fee on anything. It removes a legal prohibition. No rate has been set, no categories of merchant have been defined, and no start date has been announced. The Finance Minister has said publicly that the committee which will decide the rate has not yet taken up the question, and will not do so until Parliament has finished with the Bill. [4]

The Reserve Bank of India is not driving this. Asked about it after the Monetary Policy Committee meeting on 5 August, Governor Sanjay Malhotra called the discussion premature, observing that the amendment was still before Parliament and that the cost of running the system has to be borne by somebody. [5]

2. What is UPI, and who has been paying for it?

First, what is a “Merchant Discount Rate”?

Every non-cash payment costs something to process. Someone has to run the servers, settle the money between two banks, monitor for fraud, and answer the phone when a payment fails. Traditionally that cost is recovered through a fee called the Merchant Discount Rate, or MDR. It is a small percentage of each transaction, deducted from what the shop receives.

If you buy something for ₹1,000 with a credit card and the MDR is 1.5%, the shop gets ₹985. You still pay ₹1,000. The ₹15 is split among the various banks and companies that moved the money. MDR is, in other words, a fee on the merchant rather than on the customer, though a merchant is free to raise prices to cover it.

On credit cards and on most debit cards, MDR has always existed in India. On UPI and on RuPay debit cards, it has been zero since 1 January 2020.

Who built UPI, and who sets what it costs?

India’s payment systems are governed by the Payment and Settlement Systems Act, 2007, which makes the Reserve Bank the regulator for anything that moves money electronically. [6]

Under that Act, the RBI and the Indian Banks’ Association set up the National Payments Corporation of India (NPCI) in December 2008. NPCI is neither a government department nor an ordinary company. It is a not-for-profit company owned by a consortium of banks, created to build and run shared payments infrastructure. [7] It operates UPI, the RuPay card network, IMPS, FASTag and several other systems.

Who sets the price of a UPI transaction is a question with three answers stacked on top of each other, and it matters for everything that follows. NPCI writes the operating rules for UPI, and those rules have historically fixed its pricing: before the fee went to zero, NPCI’s cap for merchant payments was 0.30%. NPCI does that within the RBI’s regulatory framework under the 2007 Act. And since 2020, both have operated under a statutory ceiling of zero set by Parliament. The Finance Minister has confirmed that the rate, if one is introduced, will be settled by a steering committee headed by NPCI. [4]

Who is actually in the chain?

The point most commonly misunderstood about MDR is who receives it. It does not go to the app whose QR code you scanned.

A single UPI payment to a shop can pass through as many as four banks. Two of them hold the accounts: your bank, which the money leaves, and the shop’s bank, which receives it. The other two are sponsor banks. A payment app cannot connect to the UPI network directly, so it works through a bank that does, and there is one such bank behind your app and another behind the shop’s app or payment provider. If you pay from your own bank’s app, the first two roles collapse into one. On top of the banks sit the app itself and the shop’s payment gateway or aggregator.

The best available analysis of the economics suggests that the two account-holding banks take the largest shares, because their exposure scales with the rupee value moved, while the apps earn a fee per transaction that does not vary with the size of the payment. [8]

The scale is now considerable. In July 2026, UPI processed 23.66 billion transactions worth ₹29.88 lakh crore, its highest month on record, averaging 763 million payments a day. [9]

Why was UPI made free, and how?

Here is a symmetry worth noting. The amendment now before Parliament sits inside a tax Bill. So did the rule it is amending. The free-UPI guarantee was never drafted as payments legislation. It was built out of income-tax law, and that origin explains its shape.

In the July 2019 Budget speech, the Finance Minister proposed that large businesses be required to offer cheap digital payment options, that no fee be charged to customers or merchants for using them, and that the RBI and the banks absorb the cost out of what they would save by handling less cash. [10]

The mechanism had three steps.

Step one. The Finance (No. 2) Act, 2019 inserted a provision into the income-tax law requiring any business with turnover above ₹50 crore to offer certain electronic payment methods, on pain of a ₹5,000-per-day penalty. [11] [12]

Step two. The same Act inserted Section 10A into the Payment and Settlement Systems Act, 2007, saying that no bank or payment company may impose any charge, directly or indirectly, on a person making or receiving a payment by “the electronic modes of payment prescribed under” that income-tax provision. [13]

Step three. In December 2019, the Central Board of Direct Taxes made a rule listing which methods those were: RuPay debit cards, BHIM-UPI, and BHIM-UPI QR codes. [14] The Finance Minister announced the change on 28 December 2019, [15] and the CBDT confirmed that no charge, including MDR, would apply from 1 January 2020. [16]

The result was that the boundary of a nationwide price control was drawn by a tax rule, written for the entirely separate purpose of forcing large businesses to accept digital payments. Section 10A did not name UPI. It simply pointed at whatever the tax rule happened to list.

The prohibition was not decorative. When some banks continued to levy charges, the CBDT ordered them in August 2020 to refund everything collected since 1 January 2020 and to stop. [17]

If nobody was paying MDR, who was paying?

Partly the Government, and only partly.

Since 2021 the Centre has run an incentive scheme, paying the industry a subsidy in place of the fee that merchants are not allowed to pay. Taking the most recently published scheme as the example, it works as follows (this part can be skipped if too technical). [18]

• It covers only merchant payments of up to ₹2,000, and only where the recipient is a small merchant. Large merchants and larger payments are excluded.
• The rate is 0.15% of transaction value, so a ₹500 payment earns the ecosystem 75 paise.
• The shop’s bank makes the claim and shares the money down the chain to the app and gateway.
• Of an approved claim, 80% is paid each quarter unconditionally. The remaining 20% is released only if the bank meets targets on system uptime and keeps technical failures below a threshold.
• The budget for the year was ₹1,500 crore.

The industry’s position has been that this is not close to enough. The Payments Council of India put the real requirement at ₹4,000 crore to ₹5,000 crore, and proposed instead a controlled fee of 0.25% charged only to merchants with turnover above ₹40 lakh. [19]

In March 2026, the Government’s own Department of Financial Services accepted the point in writing to a parliamentary committee: the subsidy covers only 11% of what the industry spends running the system, and amounts to 14% of the fee income the industry would otherwise have earned. [20]

Was zero MDR ever going to last?

That admission invites an obvious question, and it is a fair one: if the Government’s own department says the model does not fund itself, was the free-UPI regime always going to end?

The case that it was rests on the design. The 2019 policy assumed the cost would be absorbed by banks out of savings on cash handling. That assumption was stated in the Budget speech but never tested against figures, and the industry disputed it immediately: the Payments Council of India warned in July 2019, before the rule took effect, that a zero-fee model would eventually break the businesses that sign up merchants, because banks have other ways of recovering money from customers and non-bank processors do not. [21] On the Government’s own numbers seven years later, the shortfall is roughly nine-tenths.

There is a reading that cuts the other way. Zero MDR was arguably never meant as a permanent settlement so much as a subsidy to buy adoption, and on that measure it worked: UPI went from a marginal product to 763 million payments a day. A temporary instrument that achieves its purpose and is then withdrawn is not a failed policy. The difficulty is that it was not framed as temporary. It was written into a statute, with no sunset clause and no review mechanism, and merchants and payment companies have built six years of pricing assumptions on the footing that it would hold.

Whether the policy was a mistake or a bridge is a matter of view. What is not in doubt is that the funding gap was flagged from the beginning, by industry in 2019 and by a parliamentary committee in 2026, and that the Government has now acted on it.

3. What exactly does the Bill change?

Clause 2 rewrites eighteen words in the middle of Section 10A. The rest of the section is untouched.

The section says that no bank or payment company may charge a person making or receiving a payment by certain methods. The only thing that changes is how those methods are identified.

Before the amendment, the protected methods were the ones prescribed under the income-tax provision described above, which meant the three on the CBDT’s 2019 list.

After the amendment, the protected methods are “one or more electronic modes of payment as the Central Government may, by notification, specify”. [1]

It’s important to note that a Notification is an order published by the Government in the Official Gazette. It does not require Parliament’s approval, it is not debated, and it can be issued or changed at any time.

Four consequences follow:

(a) Nothing changes until the Act is published. The Bill states that most of it takes effect from 1 April 2026, but Clause 2 operates only from the date the Act is published in the Gazette. [1] The free-UPI position is therefore untouched until then, and no charge levied in the meantime becomes lawful retrospectively.

(b) The default has flipped. Before the amendment, UPI was protected automatically, and removing that protection would have required a fresh Act of Parliament. After it, UPI is protected only for as long as the Government keeps it on a list the Government controls. Section 10A becomes a shield that exists where the executive chooses to hold it up. If nothing is notified, nothing is protected.

(c) The Bill does not create a power to charge. It removes a bar. Nothing in Clause 2 permits anyone to levy MDR or to fix its level. That power sits where it always sat, with NPCI’s operating rules and with the RBI. The result is a two-key arrangement: the Government holds the key that unlocks the door, and the regulator and NPCI hold the key that sets the price.

(d) On a plain reading, the Government can notify methods of payment rather than categories of merchant. The words are “one or more electronic modes of payment”. Most reporting has assumed the Government will be able to notify which merchants and which transaction sizes stay exempt. The words as drafted do not obviously permit that. A tiered scheme, with small shops free and large chains charged, would need either a strained definition of what counts as a “mode of payment”, or would have to be delivered through NPCI’s rules instead. This is a question the first notification will have to answer.

Why does it matter that this was done in a tax Bill?

Because the choice of vehicle determines how much scrutiny a change receives.

This Bill exists to replace an Ordinance. An Ordinance is a temporary law the President can make when Parliament is not sitting, and under Article 123 of the Constitution it lapses unless Parliament converts it into an Act within a set period. [1] That creates a deadline, and a reason to move quickly.

It also means the payments amendment travelled as part of a package. A Member who wanted to oppose the UPI clause would have had to oppose the tax exemptions for foreign funds, electronics manufacturers and diamond traders along with it. The Bill was not referred to the Standing Committee on Finance for examination as a payments measure, which is worth noting given that the same Committee had studied this exact question five months earlier.

The result is that a change to how a system carrying 763 million payments a day is funded passed the Lok Sabha without any discussion of it. Whether the Rajya Sabha takes it up substantively remains to be seen.

So will my UPI payments start costing me money?

Not today, and probably not directly. The full answer has three parts.

Nothing has been notified. Until the Government publishes a notification, the position is exactly as it was.

MDR is charged to merchants, not to customers. The Finance Minister has been emphatic on this point. [22] If a fee is eventually introduced on the pattern being discussed, it will be deducted from what the shop receives rather than added to what you pay.

But there are two routes by which a customer could still end up paying. The first is economic. A merchant facing a new cost can raise prices or add a surcharge, and nothing prevents that. The RBI Governor has put it directly: the consumer ultimately pays, though not necessarily the same consumer, and often through the wider economy where it is not visible. [5]

The second is legal, and it has had little attention. Section 10A protects a person “making or receiving” a payment, which covers the customer as well as the shop. The moment a payment method drops off the notified list, the statutory bar on charging customers on that method disappears along with the bar on charging merchants. The Finance Minister’s assurance that this will only ever touch merchants is a statement of Government policy. After this amendment, it is not a legal constraint.

4. Who says this is right, and who says it is wrong?

The case for the change

The system does not fund itself. The Parliamentary Standing Committee on Finance concluded in March 2026 that UPI needs a viable revenue source, and recorded the Department of Financial Services’ position that zero MDR makes the ecosystem financially unsustainable. The same report notes that UPI’s volume growth was expected to fall from 42% to 25% in a single year, and asks whether the platform should continue to require a ₹2,000 crore annual allocation from the Budget. [20] [23]

The cost exists whether or not it is visible. This is the RBI Governor’s position, and as a matter of arithmetic it is hard to displace. [5]

Large merchants already pay this on other cards. Some argue that for organised retail, a small UPI fee is a margin adjustment rather than a structural shock, since those merchants already pay MDR on credit and non-RuPay debit cards. Thin-margin businesses will of course need careful handling. [24]

Fee income should fund better infrastructure. The Government’s case is that it allows banks and payment companies to invest in capacity, security and fraud prevention, and that users benefit from that investment. [22]

The industry has been asking since 2019. The Payments Council of India objected to the zero-fee proposal in July 2019, before it took effect, [21] and wrote formally to the Prime Minister in March 2025 asking for it to be reconsidered. That letter noted that around 90% of the six crore merchants accepting digital payments are small merchants by the RBI’s definition, and proposed that any fee apply only to large ones. [25]

The case against

A guarantee in a statute has become a discretion in a Government office. This is the core of the Opposition’s objection: the protection that kept UPI free has been removed, the door to fees is open, and the cost will find its way to ordinary users. The funding argument is also disputed, with many saying the RBI has sufficient resources to support the infrastructure without charging anyone. [22]

It may push shopkeepers back towards cash, and the Government has the most to lose if it does. The argument runs that the principal return to the State from the UPI era was not convenience but formalisation. When a vegetable seller takes payment by QR code, the money lands in a bank account and leaves a record, whereas cash leaves none. That record is why small merchants in Bengaluru have been receiving GST notices calculated from their UPI turnover. [26] A fee added on top of that tax exposure strengthens the case for going back to cash. [8]

Cash, meanwhile, is not disappearing. In July 2026 the Government told the Lok Sabha that it had approved the RBI’s proposal to field-trial polymer ₹10 and ₹20 notes, with one billion of each to be issued, and the RBI’s printing subsidiary invited global suppliers for the material. [27] That is not a revenue-raising measure. Polymer notes are about durability and counterfeiting: they last several times longer than paper and reduce the cost of replacing worn currency, so the effect is to cut a cost rather than to create income. But it is a useful corrective to the assumption that India is on a one-way path out of cash. Currency in circulation is still growing, and the State is investing in making it last longer. A policy that makes digital payments more expensive for small merchants has somewhere to push them.

The delegation has no guardrails. The amended Section 10A sets out no criteria for the notification: no factors the Government must consider, no thresholds, no requirement to consult the RBI, and no requirement to lay the notification before Parliament. Powers to grant exemptions are routinely upheld by the courts, and there is no obvious basis on which to say this clause is legally vulnerable. But the absence of a guiding principle is a drafting choice rather than an oversight, and its effect is that the boundary of a national price control can be moved without a vote.

The process invites criticism. The Bill was passed by the Lok Sabha on a voice vote, with no discussion, as part of a package of unrelated tax measures. A payments amendment of this consequence has so far received no parliamentary scrutiny at all.

Where this leaves things

The Bill is with the Rajya Sabha. Once it passes and the Act is published in the Gazette, Clause 2 takes effect and the statutory bar on charging for UPI is replaced by whatever list the Government chooses to notify.

Until that notification appears, nothing changes for anyone. When it does appear, its wording is likely to matter more than the rate announced alongside it, because the wording will settle whether the Government can protect small merchants directly or whether that has to be done by NPCI instead.

Six years ago, keeping UPI free required an Act of Parliament. Keeping it free now requires a decision in the Ministry of Finance.

Notes and sources

1. The Taxation and Other Laws (Amendment) Bill, 2026, full text (Bill No. 150 of 2026). Clause 2 at p. 2; commencement at p. 1; Statement of Objects and Reasons at p. 8; Memorandum explaining the amendment at p. 11.
2. PRS Legislative Research, Bill summary and tracker.
3. Lok Sabha passes the Bill without discussion, 6 August 2026 (ANI).
4. The Finance Minister’s post of 6 August 2026 on MDR and the NPCI-headed steering committee.
5. RBI Governor Sanjay Malhotra, after the Monetary Policy Committee meeting, 5 August 2026.
6. Payment and Settlement Systems Act, 2007, India Code. See also Section 18, on the RBI’s general power to give directions.
7. NPCI’s constitution and mandate.
8. Nikhil Pahwa, on who actually receives MDR and on the formalisation argument. Note the author’s own published correction to an earlier version of this piece.
9. NPCI data for July 2026, via Business Standard.
10. The July 2019 Budget proposal, as reported at the time.
11. Section 269SU of the Income-tax Act, 1961, and the Section 271DB penalty.
12. CBDT release confirming both provisions came into force on 1 November 2019.
13. Section 10A as inserted, in the RBI’s consolidated text of the PSS Act.
14. CBDT Notification No. 105/2019 and Rule 119AA, the three prescribed methods.
15. The Finance Minister’s announcement of 28 December 2019.
16. CBDT Circular No. 32/2019.
17. CBDT Circular No. 16/2020, directing banks to refund charges collected since 1 January 2020.
18. Cabinet approval and full mechanics of the incentive scheme for low-value BHIM-UPI merchant transactions, FY 2024-25 (PIB). The earlier ₹2,600 crore scheme for FY 2022-23 is here.
19. The Payments Council of India’s response to the FY 2024-25 outlay.
20. Report of the Parliamentary Standing Committee on Finance, March 2026 (PDF).
21. The Payments Council of India’s objection of July 2019, before the rule took effect.
22. Jairam Ramesh’s objection and the Finance Minister’s response, 6 August 2026.
23. Analysis of the Standing Committee report and the DFS submission.
24. Pranav Pai of 3one4 Capital on the impact on merchants.
25. The Payments Council of India’s March 2025 letter to the Prime Minister.
26. Bengaluru street vendors seeking GST relief after notices based on UPI turnover (NDTV).
27. Government approval for polymer ₹10 and ₹20 banknote field trials, July 2026, and the RBI printing subsidiary’s global expression of interest.

 

This note reflects the position as at 8 August 2026, when the Bill was pending before the Rajya Sabha. It is general commentary and not legal advice on any specific transaction.