UPI's Free Lunch Is Over in Law, Not Yet in Price: What the 2026 PSS Act Amendment Really Changes

On 6 August 2026, the Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026. The Rajya Sabha returned the Money Bill on 10 August, and the Lok Sabha accepted its recommendations the same day, completing Parliament's clearance. The legislation now waits on Presidential assent. Inside a wider tax-and-investment package is a single sentence that redraws the financial plumbing of India's digital economy: a substituted clause in Section 10A of the Payment and Settlement Systems Act, 2007, which detaches the no-merchant-fees guarantee on UPI and RuPay from the Income-tax Act and parks it inside a notification power held by the central government. (The Hindu, Economic Times, Big News Network)

UPI is not a niche product. In July 2026 the network processed 23.66 billion transactions worth ₹29.88 lakh crore, an average of 763 million a day with an average ticket near ₹1,263 (NPCI via Dynamite News, India Dispatch). The 2020 zero-MDR regime turned that traffic into a public good, but it also turned the country's largest retail payment rail into a cost centre. The new amendment does not yet impose a charge. It hands the executive the legal authority to do so, and tells an NPCI-led steering committee to decide when, on which merchants, and at what rate.

The amendment does three things, each with a different blast radius.#

First, it rewrites the legal hook that froze merchant fees on UPI and RuPay debit card transactions. The old Section 10A barred any bank or system provider from imposing any charge on anyone for the electronic modes of payment prescribed under Section 269SU of the Income-tax Act. The new wording replaces that cross-reference with a delegation to the central government, which may, by notification, specify "one or more electronic modes of payment" for which the no-charge protection continues to apply. (TaxGuru, LiveMint)

Second, it is enabling, not implementing. The Bill does not prescribe a rate, a threshold, or a date. The government, after receiving assent, will issue a notification that defines the scope of any future MDR, on the recommendation of a UPI and Services Steering Committee chaired by NPCI. Finance Minister Nirmala Sitharaman told the Rajya Sabha that the new provision "does not impose any tax or transaction charge on UPI users" and that "no MDR framework has yet been finalised." (Big News Network)

Third, it triggered a political fight. The Congress argued the change is the first step toward the end of free UPI, and the wider Opposition stalled the Lok Sabha debate. The Bill was passed by voice vote without discussion. The government rebutted the claim repeatedly, with both the Finance Minister and RBI Governor Sanjay Malhotra saying the public will not pay an explicit fee, and that any MDR would be a merchant-side levy (Economic Times BFSI). The number to keep in mind is 763 million. That is the average daily UPI transaction count for July 2026. Multiply that by any non-zero MDR, and you see why a small legislative edit is moving markets before a single basis point is charged.

Background: the architecture of "free" payments#

To understand why a small legislative edit matters so much, it helps to know who currently pays for UPI.

A Merchant Discount Rate, or MDR, is the fee a merchant pays to its bank and payment service provider each time a customer pays digitally. In India, debit card MDR is capped at 0.5% for transactions below ₹2,000 and 0.9% above; credit card MDR can run as high as 1.8%. (CNBC TV18)

UPI was different. The RBI and the government phased out UPI MDR for person-to-merchant transactions in 2019, and the 2020 Finance Act extended the zero-MDR regime to RuPay debit cards and the BHIM-UPI QR code mandated under Section 269SU. The intention was straightforward: at zero price, push India off cash. It worked. Between FY21 and FY26, the annual value of UPI transactions rose from a few lakh crore to ₹314 lakh crore, a roughly 50x expansion that puts UPI among the largest real-time payment networks in the world (PIB).

The cost of that success sits on three balance sheets. The issuing bank pays the acquiring bank a small interchange-like fee. The payment service provider funds the app, the fraud engine, and the customer support layer. The government pays out an annual incentive, typically 0.10% to 0.15% of transaction value capped at a few thousand crore, to keep the rail warm. MobiKwik CEO Upasana Taku told CNBC-TV18 that the UPI subsidies in place today "barely cover 10 to 11% of these costs" and that the rest is absorbed by the banks and fintechs running the network. (CNBC TV18, MediaNama)

That is the trade-off the new amendment reframes. India is no longer trying to bootstrap digital payments. It is trying to make the rail pay for itself.

Market implications#

The shape of the impact depends on three numbers the NPCI-led steering committee has yet to publish: the rate, the merchant threshold, and the transaction-value cut-off.

The Payments Council of India has proposed 0.30% to 0.50% as a sustainable merchant fee, broadly aligned with the pre-2020 UPI P2M rate and well below card MDR. Some reports put the lower end as low as 5 to 7 basis points. (Business Today heatmap, JustLast)

The merchant threshold is expected to be an annual turnover above ₹1 crore to ₹1.5 crore. PCI data shows that about 90% of India's 60 million digital-accepting merchants fall below the ₹20 lakh mark, so the eligible cohort is small in count and large in value. A transaction cut-off above ₹2,000 captures about 4% of all UPI P2M volume. Stack a 0.30% rate and a 30% acquirer share on the eligible value and you get a ₹2,000 to ₹3,000 crore acquirer revenue pool annually, with a total ecosystem pool of ₹3,500 to ₹5,000 crore per Zeta's SVP Mehul Mistry. (JustLast citing Mistry/ET)

The equity impact is most visible in three buckets. State Bank of India, ICICI Bank, and Axis Bank are the dominant acquirers in UPI and would capture the largest share of merchant fee revenue. Listed payments enablers, including PayU, Pine Labs, and imminent IPO candidates, get a direct monetisation tailwind. Discount brokers Groww and Zerodha face an offsetting cost. The average ticket for UPI-funded investment flows sits around ₹8,963, and a 0.25% fee on a ₹10,000 SIP costs ₹25, cutting the typical 0.75% distribution margin to about a third. Groww's per-order charge of 0.1% capped at ₹20 is the most exposed line item. (The Week)

Fixed income and FX are second-order. A monetised UPI reduces the implicit subsidy the banking system has been carrying, which marginally tightens net interest margins for issuing banks and could support a small re-rating of the PSU bank complex. There is no first-order effect on the rupee.

Who earns what#

The cleanest way to think about MDR economics is to walk the flow of a single large-enterprise UPI transaction.

A ₹10,000 payment at a large retailer at a final rate of 0.30% above ₹2,000 generates ₹30 in MDR. That ₹30 is split three ways. The acquiring bank takes roughly a quarter to a third for settlement, fraud liability, and infrastructure. The issuer takes a similar share for customer-side costs. The remainder is the payment service provider's take: the company that runs the UPI app, the QR code stack, and the merchant dashboard.

One structural detail: the 30% market-share cap that NPCI introduced for individual UPI apps, aimed at the PhonePe and Google Pay duopoly, was recently pushed to 31 December 2026 for compliance. (PayYantra Pulse #22, EnKash) The postponement, combined with the prospect of MDR revenue, gives the dominant incumbents more breathing room. For a smaller player such as MobiKwik, the same MDR is more transformational. A few basis points of fee on a billion monthly transactions is, in their pricing model, the difference between a path to break-even and continued losses.

For quantitative analysts, the relevant model is straightforward: acquirer revenue per year equals eligible P2M transaction value times applicable MDR times acquirer share. The upper bound at a 0.30% rate and 0.30 acquirer share is ₹2,000 to ₹3,000 crore, which explains why the amendment is being read as earnings-accretive for SBI, ICICI, and Axis on a multi-year view.

Critical analysis#

The amendment is sound policy, but the case for caution is real.

On the upside, the legal change finally matches the economic reality. Banks and PSPs have been subsidising the world's largest real-time payment network for five years, and a small merchant-side fee is the cleanest way to fund continued investment. The carve-out for small merchants and P2P protects financial inclusion, and the delegation to an NPCI-led committee preserves operational flexibility.

The limitations are real too. The amendment is silent on the rate, threshold, and categories. A merchant with turnover just above the threshold has no way to model next year's cost without a notification, and equity markets dislike that uncertainty. The lack of an explicit sunset clause means no automatic expiry if the fee suppresses adoption.

Merchant pass-through is a real risk, despite the legal bar. A 0.30% fee on a high-volume retailer is enough to nudge pricing on a competitive product, and the line between "no surcharge on UPI" and "small price adjustment to reflect payment cost" is already thin. Card networks benefit from any friction on UPI.

The headline numbers are not settled, either. The 0.30% rate and the ₹1.5 crore turnover cap are press estimates, not government policy. The "consumer pays nothing" claim is, in the words of the RBI governor himself, "premature" and is part of a "user pays" model where the user is the merchant and the cost is "ultimately … already happening" in the general economy. (Economic Times BFSI)

Competing interests are lined up. The Payments Council of India, the merchant community, and the brokers want a low rate, narrow scope, and clear sunset. Card networks prefer no rate at all. PSU banks want a rate high enough to fund the next leg of investment, including the Digital Payments Intelligence Platform flagged by the RBI governor. The Finance Ministry, electorally, wants a number that does not look like a UPI tax.

The most plausible unintended consequence is fee arbitrage. Once UPI MDR exists, expect a wave of point-of-sale innovations designed to split a single large transaction into smaller sub-₹2,000 legs that stay free. Some of that is healthy. Most of it is regulatory noise.

UPI MDR has a five-year history of being debated, killed, and reborn. Before 2020, UPI person-to-merchant transactions attracted a small fee, capped at 0.30% for debit instruments and a few rupees per UPI transaction. The 2020 zero-rating was part of a broader push to formalise the economy after demonetisation, with the cost hidden in banks' cost-to-income ratio and the government's annual UPI incentive budget.

The current cycle began in late 2024, when the Parliamentary Standing Committee on Finance recommended a return to a "user pays" model, pointing to the European Union and Australia, where a similar Merchant Service Charge exists on online card payments. (MediaNama)

Compared with the 2020 zero-MDR shock, the 2026 move is incremental, not structural. The network effect, the regulatory architecture, and the consumer-facing experience are all preserved. What changes is the marginal economics of every P2M transaction above the cut-off. If the final MDR sits at 0.05% to 0.07%, this is a cyclical tweak. If it sits at 0.30% to 0.50%, it is a structural change, marking the formal end of "free" UPI for the merchant side. Either way, the policy direction is set.

Key takeaways#

1. The amendment is enabling, not implementing. It gives the central government, on the recommendation of an NPCI-led committee, the power to set merchant fees. No rate, threshold, or date has been notified.
2. UPI is the rail under the spotlight. July 2026 saw 23.66 billion UPI transactions worth ₹29.88 lakh crore. Even a few basis points of MDR is a large pool.
3. Incumbents gain; challengers gain more. SBI, ICICI, Axis, PhonePe, Google Pay, and Paytm are the natural beneficiaries. Discount brokers Groww and Zerodha face a margin hit on UPI-funded investments.
4. The consumer is the political constraint, not the legal one. FM Sitharaman and Governor Malhotra have both stressed that consumers will not pay an explicit fee. The political durability of the policy depends on keeping that promise.
5. Watch the NPCI-led steering committee. The first notification will be the cleanest read on the new policy direction: rate, scope, and sunset clause, if any.

Frequently asked questions#

Will I be charged for using UPI after the amendment?

No. The amendment itself does not impose any charge on consumers. The Finance Minister has stated repeatedly that any future merchant fee will be a merchant-side levy. (TaxGuru)

Has the Merchant Discount Rate (MDR) already been set?

No. The Bill is an enabling provision. The NPCI-led UPI and Services Steering Committee will recommend a rate, threshold, and scope after the legislation receives Presidential assent. (Moneycontrol)

Which merchants are likely to be affected?

Reporting suggests large merchants with annual turnover above ₹1 crore to ₹1.5 crore, and only on transactions above ₹2,000. That covers a small share of merchants by count but a disproportionate share of value. (JustLast)

How does the proposed UPI MDR compare with card MDR?

Even at the higher end of the reported range (0.30% to 0.50%), UPI MDR would be several times cheaper than credit card acceptance (up to 1.8%) and roughly half the cost of non-RuPay debit cards. (CNBC TV18)

Why did the government make this change now?

With UPI now processing around 75 crore transactions a day and the rail mature, the government is moving from the subsidisation phase to a sustainable-revenue phase, broadly in line with the 2024 Parliamentary Standing Committee recommendation. (MediaNama)

References#

1. The Hindu, Lok Sabha clears Bill to authorise Government to permit banks to levy charges on UPI: https://www.thehindu.com/news/national/parliament-monsoon-session-lok-sabha-clears-bills-taxation-upi-transactions-charges/article71313208.ece
2. Economic Times, Lok Sabha passes Bill enabling Centre to allow UPI charges, MDR on digital payments: https://economictimes.indiatimes.com/news/economy/policy/lok-sabha-passes-bill-enabling-centre-to-allow-upi-charges-mdr-on-digital-payments/articleshow/132999568.cms
3. Big News Network, Parliament clears Taxation and Other Laws (Amendment) Bill, Sitharaman says no UPI MDR for consumers and small merchants: https://www.bignewsnetwork.com/news/279230123/parliament-clears-taxation-and-other-laws-amendment-bill-sitharaman-says-no-upi-mdr-for-consumers-small-merchants
4. LiveMint, Tax amendment bill passed in Lok Sabha: what changes for UPI transactions: https://www.livemint.com/news/india/tax-amendment-bill-passed-in-lok-sabha-what-changes-for-upi-transactions-offshore-fund-norms-nirmala-digital-payments/amp-11786066421579.html
5. TaxGuru, Will UPI Transactions Be Charged? Government Clarifies After Lok Sabha Passes Bill: https://taxguru.in/income-tax/upi-transactions-charged-government-clarifies-lok-sabha-passes-bill.html
6. Moneycontrol, Lok Sabha passes the amendment to the taxation bill that could facilitate MDR on UPI: https://www.moneycontrol.com/technology/lok-sabha-passes-the-amendment-to-the-taxation-bill-that-could-facilitate-mdr-on-upi-article-13996842.html
7. Economic Times BFSI, Consumers already bearing UPI costs indirectly, says Malhotra: https://bfsi.economictimes.indiatimes.com/amp/news/fintech/consumers-already-bearing-upi-costs-indirectly-malhotra/132999658
8. Times of India, AI can bring to lending what UPI did to payments, says RBI governor: https://timesofindia.indiatimes.com/business/india-business/ai-can-bring-to-lending-what-upi-did-to-payments-rbi-governor/amp_articleshow/133146232.cms
9. NPCI product statistics (UPI): https://www.npci.org.in/product/upi/product-statistics
10. Dynamite News, Indian UPI processed record 23.66 billion transactions worth ₹29.88 lakh crore in July: https://www.dynamitenews.com/national/indian-upi-processed-record-2366-billion-transactions-worth-rs-2988-lakh-crore-in-july
11. India Dispatch, UPI: How India Spends: https://spends.indiadispatch.com/upi
12. Economic Times BFSI, UPI transactions surge by 22% in July, reaching ₹29.88 lakh crore: https://bfsi.economictimes.com/amp/articles/upi-transactions-surge-by-22-in-july-reaching-2988-lakh-crore/132816563
13. PIB, UPI Annual Transactions FY2026: https://www.pib.gov.in/PressReleasePage.aspx?PRID=2257087
14. CNBC TV18, Why UPI's business model is back under scrutiny, MobiKwik Upasana Taku interview: https://www.cnbctv18.com/business/finance/explained-upi-mdr-fee-debate-fintech-digital-payment-mobikwik-sbi-19965614.htm
15. Business Today, UPI MDR heatmap: SBI, ICICI Bank, Axis Bank and PhonePe stand to gain, retailers could pay more: https://www.businesstoday.in/industry/banks/story/upi-mdr-heatmap-sbi-icici-bank-axis-bank-and-phonepe-stand-to-gain-retailers-could-pay-more-report-547732-2026-08-06
16. JustLast, UPI MDR Revival 2026: proposed merchant fee on large UPI: https://www.justlast.in/upi-mdr-revival-in-2026-what-the-proposed-merchant-fee-means-for-indias-digital-payments-ecosystem/
17. Forbes India, What is merchant discount rate on UPI and why does India want to bring it back: https://www.forbesindia.com/article/news/explainer/what-is-merchant-discount-rate-on-upi-and-why-does-india-want-to-bring-it-back/2996894/1
18. The Week, How will UPI MDR affect your mutual funds and equity investments: https://www.theweek.in/news/biz-tech/2026/08/10/how-will-upi-mdr-affect-your-mutual-funds-and-equity-investments.amp.html
19. MediaNama, Parliamentary Standing Committee on Finance calls for return of MDR on UPI: https://www.medianama.com/2026/03/223-parliamentary-committee-calls-return-mdr-upi-implications-users-small-merchants
20. PayYantra LinkedIn, PayYantra FinTech Pulse Edition #22, 3 to 9 August 2026: https://www.linkedin.com/pulse/payyantra-fintech-pulse-edition-22-3-9-august-2026-payyantra-ida0c
21. EnKash, Your Fresh Source of Fintech Updates (August 2026): https://www.enkash.com/resources/blog/enfin-your-fresh-source-of-fintech-updates-august-2026-edition
22. The Tribune, UPI opening new frontiers beyond payments into digital lending, says PhonePe VP: https://www.tribuneindia.com/news/business/upi-opening-new-frontiers-beyond-payments-into-digital-lending-says-phonepes-vp-for-government-affairs/

Disclaimer. This article is for informational purposes only and does not constitute investment advice, a trading recommendation, or a forecast. Forward-looking statements about policy or revenue are estimates and are clearly identified as such. Verify primary sources before acting.