India’s Unified Payments Interface (UPI) has been among the most celebrated public digital infrastructure successes globally, processing billions of free peer-to-merchant transactions monthly. This free-for-all model faces a potential turning point with the passage of the Taxation and Other Laws (Amendment) Bill, 2026, by the Lok Sabha on 6 August 2026, which empowers the government to notify categories of UPI transactions on which banks and payment companies may levy a Merchant Discount Rate (MDR).
This development is significant because it touches millions of small merchants, gig workers, and consumers who have grown accustomed to zero-cost digital payments since 2020, when the government mandated that UPI and RuPay debit card transactions would attract no MDR charges. The proposed change comes amid growing recognition, articulated by RBI Governor Sanjay Malhotra, that “someone will have to pay the cost” of UPI transactions, since banks, payment processors, and taxpayers currently absorb this cost through budgetary subsidies that have been shrinking — from Rs 3,631 crore in 2023-24 to a budgeted Rs 2,000 crore in 2026-27.
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For UPSC and SSC aspirants, this is a high-value topic combining public finance, digital economy governance, financial inclusion policy, and legislative process — themes regularly tested in GS-III Economy sections and increasingly in SSC General Awareness sections given UPI’s ubiquity in current affairs.
Background and Context
Five Important Key Points
- Since 2020, UPI and RuPay debit card transactions have been exempted from Merchant Discount Rate (MDR) charges under an amendment to the Payment and Settlement Systems Act, 2007 read with Section 269SU of the Income Tax Act, 1961.
- The Taxation and Other Laws (Amendment) Bill, 2026, passed by the Lok Sabha on 6 August 2026, modifies this framework to allow the government to notify categories of UPI transactions that may attract MDR charges.
- Government sources indicate the proposed MDR would likely apply only to large merchants with annual turnover exceeding Rs 1-1.5 crore and to transactions exceeding Rs 2,000 in value, which would exclude about 95% of current UPI transactions.
- The government’s Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions, which subsidises banks for small merchant transactions below Rs 2,000, has seen its allocation fall from Rs 3,631 crore in 2023-24 to a budgeted Rs 2,000 crore for 2026-27, signalling fiscal pressure on the subsidy model.
- Finance Minister Nirmala Sitharaman stated that final MDR rates have not been decided, but justified the move as necessary to help banks and fintech companies invest in infrastructure, innovation, and security, arguing all UPI users would benefit from this investment.
Understanding MDR and the Cost Structure of Digital Payments
A Merchant Discount Rate is the fee merchants pay to banks and payment processors for facilitating digital transactions, typically comprising an interchange fee (paid to the card/UPI-issuing bank), processing charges (paid to payment gateways such as Razorpay or PayU), a network fee (paid to networks like the National Payments Corporation of India), and applicable Goods and Services Tax. For non-UPI instruments, MDR ranges from 0.4-0.9% for debit cards to as high as 3-4.5% for international credit cards. Since UPI’s inception, this entire cost structure has been effectively subsidised out of the public exchequer to promote digital adoption — an unusual but deliberate policy choice reflecting India’s Digital India and financial inclusion priorities.
Legislative and Legal Framework
The change operates through an amendment to the Payment and Settlement Systems Act, 2007, which currently instructs banks “not to impose a charge for using electronic modes of payment” listed under Section 269SU of the Income Tax Act, 1961 — a provision that includes RuPay debit cards and UPI/BHIM-UPI transactions. The 2026 Bill modifies this to give the government discretionary power to notify which transaction categories may attract charges, effectively converting an absolute statutory prohibition into a conditional, government-controlled exemption. This is a significant shift in legislative design: rather than Parliament debating specific MDR rates, the executive retains ongoing flexibility to calibrate charges through delegated legislation (notifications), a pattern increasingly common in India’s tax and financial regulation architecture.
Economic Implications and Digital Inclusion Concerns
UPI has been central to India’s financial inclusion narrative, having overtaken cash for a large share of retail transactions and having been showcased internationally, including through G20 platforms, as a model for developing economies. Introducing even a modest MDR risks two divergent outcomes: on one hand, it could inject sustainable revenue into the banking and fintech ecosystem, funding fraud prevention, infrastructure upgrades, and innovation — addressing genuine concerns about UPI-related fraud that has risen with transaction volumes. On the other hand, if implemented carelessly, it could see merchants passing costs onto consumers, potentially reversing gains in cash-to-digital migration, particularly among small kirana stores and street vendors who form the backbone of India’s informal retail economy.
Bihar and Regional Relevance
Bihar, with its large population of small and marginal traders, migrant remittance-dependent households, and Jan Dhan account holders, has been a significant beneficiary of UPI’s zero-MDR regime, particularly through the Direct Benefit Transfer (DBT) ecosystem and low-value merchant transactions in rural haats and local markets. Any MDR imposition on transactions above Rs 2,000 could disproportionately affect Bihar’s agricultural produce transactions and small manufacturing units, even though the government’s proposed threshold seeks to exempt the vast majority of small transactions. Bihar’s Department of Finance and its Bihar Financial Inclusion campaigns will need to closely monitor implementation guidelines once notified.
Governance and Implementation Challenges
A key challenge lies in defining “large merchants” fairly, given India’s vast informal economy where turnover reporting is often unreliable. There are also concerns about regulatory capture, as banks and payment aggregators have lobbied for MDR restoration for years, raising questions about whose interests are being prioritised. Additionally, since MDR would be levied through executive notification rather than primary legislation, parliamentary oversight and public consultation on the actual rates remain limited, raising transparency concerns.
Way Forward
The government should adopt a graded, transparent MDR structure that is publicly consulted upon before notification, with a sunset clause for review after two years. A dedicated grievance and dispute mechanism should be established for merchants facing incorrect turnover classification. Continued targeted subsidy for genuinely small merchants — particularly those in rural and semi-urban India, including Bihar — should be preserved even as MDR is introduced for high-value commercial transactions, ensuring India’s financial inclusion gains are not reversed.
Relevance for UPSC and SSC Examinations
This topic falls under GS-III (Indian Economy: Inclusive growth, mobilisation of resources, digital economy, and banking) and GS-II (Government policies and interventions). For SSC, key terms include Merchant Discount Rate (MDR), Unified Payments Interface (UPI), Payment and Settlement Systems Act 2007, Section 269SU of the Income Tax Act, National Payments Corporation of India (NPCI), and the Taxation and Other Laws (Amendment) Bill 2026.