Lok Sabha Clears Bill Empowering Government to Permit Banks to Levy UPI Charges

The Lok Sabha amended the Payment and Settlement Systems Act, 2007, on August 6, 2026. With this change, the government can now let financial institutions and other service providers charge for using the universal payments interface (UPI) and other officially announced electronic payment methods.

The government revised the Payment and Settlement Systems Act, 2007, through the Taxation and Other Laws (Amendment) Bill. The Opposition's constant sloganeering over a variety of problems, including the alleged theft of donations at the Ram temple in Ayodhya, led to the changes' passage without debate. In order for banks and payment processors to be able to charge Merchant Discount Rate (MDR) on notified electronic payment modalities, the current legislative clause prohibiting this practice must be removed.

The Financial Cycle Behind UPI Payments

UPI is at liberty. Touch, pay, and done. No cost, no hassle. However, the actual expenses of maintaining that system are borne by banks and payment processors behind the scenes. They were unable to impose an MDR on UPI transactions made by merchants beginning in January 2020. Instead, the government provided subsidies. However, the UPI boom has outpaced that subsidy. The monthly volume of UPI transactions has skyrocketed, reaching lakhs of crores of rupees.

Furthermore, incentive payments barely scratch the surface of what financial institutions and payment processors really shell out to maintain service. So, should businesses begin paying again? That is the question the government is currently asking. Legislation to amend the Payment and Settlement Systems Act has been introduced by Minister of Finance Nirmala Sitharaman. With this change, MDR can be used again for some UPI transactions. An MDR of 0.3% to 0.5%, applicable solely to larger merchants surpassing a turnover threshold, and on transactions exceeding INR 2,000, is the proposal under consideration.

Who will be Affected?

The transfer process is anticipated to remain unaffected for small business owners and regular consumers. At its most basic level, nothing changes if the user is making a purchase from a nearby vegetable vendor. A minor fee may be imposed on merchants by large retail chains in order to cover the processing costs of customer payments over INR 2,000. Additionally, please be informed that the small transaction fee will be charged to the merchant and not the consumer.

The cost of maintaining a payments network of this scale is high, according to RBI Governor Sanjay Malhotra. Everything from servers and infrastructure to fraud checks and settlement systems is expensive. Currently, subsidies cover a portion of that cost for the government. Payment processors and banks discreetly take care of the remainder. It was clear from Malhotra's argument that an arrangement can't last forever. There must be a source for the funds. Ultimately, it comes down to who pays: the government, the business, or the customer.