The government has introduced the Taxation and Other Laws (Amendment) Bill, 2026, seeking to allow a Merchant Discount Rate (MDR) on UPI business transactions exceeding ₹2,000. This proposal aims to support the long-term financial sustainability of India’s digital payment infrastructure. While person-to-person transfers will remain free, the move shifts the focus toward how processing costs might be covered, raising questions about potential impacts on merchant adoption and consumer prices.
The landscape of digital payments in India may be shifting as the government introduces the Taxation and Other Laws (Amendment) Bill, 2026. This legislation proposes amending the Payment and Settlement Systems Act, 2007, to provide the legal framework for potential fees on specific UPI transactions. If passed and notified, this change would allow for the reintroduction of a Merchant Discount Rate (MDR) on business-related UPI payments that exceed ₹2,000.
Sustainability of Payment Infrastructure
For years, UPI has operated under a zero-MDR regime, which has been credited with its massive adoption. However, stakeholders have increasingly pointed to the rising cost of maintaining and upgrading the vast digital payment network. Reserve Bank of India Governor Shaktikanta Das recently emphasized that the infrastructure requires consistent investment to stay secure and efficient. He noted that while the debate over who pays is ongoing, costs are necessary to sustain the system. He highlighted that these costs are eventually borne by the broader economic system, whether paid by merchants or indirectly passed on to consumers.
Targeted Impact on High-Value Transactions
The proposed structure is designed to be highly targeted. Data suggests that transactions above ₹2,000 account for only about 4% to 5% of the total number of UPI transactions but represent roughly 65% to 67% of the total value processed. By focusing on this segment, regulators aim to generate revenue for infrastructure maintenance while ensuring that the daily small-ticket payments for groceries, transport, or street vendors—which make up the bulk of UPI usage—remain unaffected and free for users.
Market and Investor Context
For the financial sector, this development is significant. Payment service providers and banks, which invest heavily in technology and security for UPI, have long advocated for a way to recover processing costs. A move to allow MDR, potentially in the range of 0.25% to 0.4%, could improve the unit economics for digital payment businesses. However, this also introduces a risk factor. If merchants are required to pay a fee, there is a possibility that they may pass these costs on to consumers in the form of higher prices for goods and services. Furthermore, if the costs are too high, there is a risk of merchant resistance, which could slow down the adoption of UPI for medium and large-ticket business payments.
Investors in the fintech and banking space will be closely tracking the final implementation details. The primary monitorables include the final notified rate, the exact date of implementation, and how merchants react to the new fee structure. The market will also watch for potential shifts in consumer behavior if merchants decide to implement surcharges on digital payments to offset these processing costs.