The Lok Sabha on Thursday passed a Bill to amend the Payment and Settlement Systems Act, 2007, authorising the government to permit banks and other payment service providers to levy charges on payments made through the Unified Payments Interface (UPI) and other notified electronic payment modes.
The amendment, passed without discussion amid disruptions, seeks to remove the existing legal provision that bars banks and payment service providers from levying Merchant Discount Rate (MDR) on notified electronic payment modes.
While real-time payments through RTGS and NEFT attract service charges, UPI transactions have so far remained exempt from such charges.
The proposed amendment to the Payment and Settlement Systems Act forms part of the Taxation and Other Laws (Amendment) Bill, 2026, which was introduced in the House on Tuesday.
The Bill was passed by voice vote after the House resumed at 2 p.m. following an earlier adjournment.
Soon after the House reassembled, Finance Minister Nirmala Sitharaman moved the Taxation and Other Laws (Amendment) Bill, 2026, further to amend the Payment and Settlement Systems Act, 2007, the Income Tax Act, 2025, and the Finance Act, 2026, for consideration.
The government said the changes aim to enable the levy of a nominal charge on digital payment services while ensuring a sustainable revenue model for banks, payment service providers (PSPs) and payment infrastructure firms that support the digital payments ecosystem.
"In the Payment and Settlement Systems Act, 2007, in Section 10A, for the words, figures and letters 'the electronic modes of payment prescribed under section 269SU of the Income-tax Act, 1961', the words 'one or more electronic modes of payment as the central government may, by notification, specify' shall be substituted with effect from the date of publication of this Act in the Official Gazette," the Bill said.
Section 10A of the Payment and Settlement Systems Act, 2007, bars banks and payment system providers from imposing charges on electronic payments, while Section 269SU of the Income Tax Act requires businesses with an annual turnover of more than Rs 50 crore to accept payments through specified electronic modes, including RuPay debit cards and BHIM-UPI QR codes.
At present, banks and payment system providers cannot impose any charge, directly or indirectly, for using the electronic payment modes prescribed under Section 269SU of the Income Tax Act, 1961.
Speaking on the issue on Wednesday, Reserve Bank of India Governor Sanjay Malhotra said it was "premature" to discuss the levy of MDR on digital payments.
Investment in public payment infrastructure is necessary, he said, adding that someone would ultimately have to bear the cost.
"The choices before us are simple: either the general public has to pay for it through taxes, or we have to levy the merchant discount rate (MDR), following the 'user pays' model," Malhotra said.
"Right now the government is getting us the amendment. Costs have to be paid by someone. We all want this public infrastructure to strengthen and become more efficient, etc. We continue to do that. That is our focus right now; let us wait and watch for further developments," he added.
The levy of MDR has remained a contentious issue, with banks and other stakeholders in the payments industry pressing for its introduction, while the government has so far not permitted such charges even as the use of digital payment platforms such as UPI has continued to grow rapidly.
Some industry observers expect MDR to be introduced for merchant UPI transactions above a specified value, while peer-to-peer transactions may continue to remain exempt.
Malhotra said someone would have to bear the cost of maintaining the payments ecosystem.
Under the "user pays" principle, he said, the merchant or person carrying out the transaction bears the MDR, but in the absence of such charges, the cost is ultimately borne by the general public through taxes.
"What is important is that we continue to invest and continue to find the means, whether it is MDR or others. Let us wait and see how the situation evolves," he said.
(With inputs from PTI)