The Indian financial ecosystem is undergoing a massive transformation. On August 6, 2026, the Lok Sabha passed a sweeping piece of legislation that fundamentally alters how digital transactions, including the Unified Payments Interface (UPI), will be governed and monetized.
The Taxation and Other Laws (Amendment) Bill, 2026, moved by Finance Minister Nirmala Sitharaman, was passed via voice vote. It touches upon everything from foreign portfolio investments to electronics manufacturing. However, the most talked-about aspect is how it addresses digital payment fees.
For years, users and merchants have enjoyed a zero-fee ecosystem. With this bold legislative move, the Payment and Settlement Systems Act Amendment officially removes previous legal barriers, giving the government the authority to permit banks and service providers to levy charges on everyday electronic payments.
If you are wondering whether you will now have to pay a fee every time you scan a QR code at a local tea stall, you are in the right place. This comprehensive guide covers every single detail of the new bill, the Reserve Bank of India’s (RBI) stance, and how these changes will impact both consumers and businesses.
Understanding the Payment and Settlement Systems Act Amendment
The Payment and Settlement Systems Act amendment modifies Section 10A of the 2007 Act and Section 269SU of the Income Tax Act. It eliminates the legal prohibition that previously prevented banks and payment service providers from charging a Merchant Discount Rate (MDR) or other fees on UPI and notified electronic payments.
Prior to this amendment, the law was strict. Section 10A of the original 2007 Act strictly prohibited banks and payment system providers from imposing any charges on electronic payments.
Furthermore, Section 269SU of the Income Tax Act required large businesses—specifically those with an annual turnover exceeding Rs 50 crore—to accept payments through specific electronic modes like RuPay debit cards and BHIM-UPI QR codes without passing any extra costs to the consumer.
Under the old rules, no bank could impose any charge, directly or indirectly, for using these prescribed electronic modes.
The new bill changes the wording entirely. It substitutes the old legal language with a provision that allows “one or more electronic modes of payment as the central government may, by notification, specify” to carry permissible charges. This officially opens the door for a monetized digital payment ecosystem.
Why Was the Payment and Settlement Systems Act Amendment Necessary?
Sustaining a massive, real-time public infrastructure like UPI requires significant capital. This amendment ensures that payment service providers (PSPs) and infrastructure firms have a sustainable revenue model to maintain server costs, enhance cybersecurity, and keep the digital payment ecosystem efficient.
The UPI platform has grown at an unprecedented and handsome pace over the last few years. While the zero-fee model drove massive public adoption, it left banks and tech companies bearing the high infrastructural costs.
Stakeholders in the payment industry have long argued that the current model is not financially sustainable. Processing millions of real-time microtransactions requires vast server space, constant cybersecurity upgrades, and round-the-clock technical support.
By amending the Act, the government aims to create a balanced environment. It wants to ensure that the infrastructure providers can generate revenue while keeping the costs minimal enough so that small businesses and everyday consumers are not discouraged from going digital.
Will Normal Users Pay UPI Transaction Fees?
While the new digital payments bill allows for transaction fees, financial experts anticipate that everyday peer-to-peer (P2P) transfers between friends and family will remain entirely free. Any future Merchant Discount Rate (MDR) or transaction fee is expected to apply primarily to larger commercial transactions between customers and merchants.
Real-time payments made through systems like RTGS and NEFT already involve a small service charge. UPI transactions, however, have historically enjoyed complete exemption.
With the new bill passed, the immediate fear is that scanning a QR code will incur an extra cost. However, market watchers expect a tiered approach.
The government and the RBI are highly likely to exempt small-ticket transactions. If an MDR is applied, it will likely kick in only for transactions above a certain monetary threshold.
Moreover, the fee burden usually falls on the merchant receiving the payment, rather than the consumer making it. Small street vendors will likely remain protected under the zero-fee umbrella to preserve financial inclusion.
RBI’s Stance: The ‘User Pays’ Model vs. Taxpayer Funding
RBI Governor Sanjay Malhotra recently clarified that public infrastructure must be funded either by general taxpayers or through a ‘user pays’ model via a Merchant Discount Rate (MDR). He emphasized that while the government is enabling these charges, the primary focus remains on strengthening the efficiency of the payments network.
Speaking a day before the bill was passed, RBI Governor Sanjay Malhotra stated that it was slightly “premature” to speculate on the exact MDR rates.
However, he laid out a very clear economic reality: someone always has to pay for public infrastructure.
He explained that the choices are remarkably simple. Either the general public pays for the UPI infrastructure indirectly through national taxes, or the system shifts to a ‘user pays’ model where the merchant or transacting individual covers the cost through an MDR.
“Right now the government is getting us the amendment,” Malhotra noted. “Costs have to be paid by someone. We all want this public infrastructure to strengthen… Let us wait and watch for further developments.”
Massive Boost for Domestic Electronics Manufacturing and Cloud Companies
Beyond digital payment fees, the Taxation and Other Laws (Amendment) Bill, 2026, introduces massive tax holidays until 2040-41 for foreign companies manufacturing electronics in India. It also removes complex approval hurdles for foreign cloud companies leasing Indian data centers, making India a global tech hub.
While the digital payments aspect grabbed the headlines, this legislation is a comprehensive taxation bill meant to lure global capital to Indian shores.
The bill extends a lucrative income tax exemption all the way to 2040-41 for foreign companies that engage Indian contract manufacturers to produce electronic goods. This covers mobile phones, personal computers, laptops, tablets, servers, and their key accessories.
To prevent supply chain bottlenecks, the bill also offers a 15-year tax exemption for foreign companies storing electronic components in Indian customs warehouses.
Additionally, foreign cloud computing firms no longer need strict prior approvals and notifications to use Indian data centers. The bill even proposes that Indian data centers can be run on a leased basis rather than strictly under direct ownership, drastically lowering the barrier to entry for global tech giants.
Making India Attractive for Foreign Portfolio Investors (FPIs)
The new bill makes it significantly easier for global fund managers to relocate their operations to India. It achieves this by relaxing the strict conditions that previously caused their global income to be taxed by Indian authorities simply because the manager resided in the country.
This legislation effectively replaces a previous ordinance issued on June 5. That ordinance provided essential income tax exemptions to interest income and capital gains made by Foreign Portfolio Investors (FPIs) from their investments in Government Securities (G-Secs).
By officially converting this ordinance into an Act, the government is signaling policy certainty to global markets. Finance Ministry sources have reiterated that all these proposals share a single, unified purpose: making India a highly predictable and attractive destination for global capital.
Political Context: Passed Amidst Opposition Protests
The Taxation and Other Laws (Amendment) Bill, 2026, was the seventh bill passed in the ongoing Monsoon Session of the Lok Sabha and notably the fifth to be passed entirely without debate due to heavy opposition sloganeering.
The passage of such a monumental economic bill occurred amidst high political drama. The House experienced significant din and had to be adjourned earlier in the day.
When the Lok Sabha resumed at 2:00 PM, Finance Minister Nirmala Sitharaman quickly moved the bill for consideration.
Opposition members were actively protesting and raising slogans regarding various political issues, including the alleged theft of donations at the Ram temple in Ayodhya.
Due to the continuous uproar, no formal debate took place. When Lok Sabha Speaker Om Birla called upon RSP Member N.K. Premachandran to move a statutory resolution disapproving the prior ordinance, he remained silent. Consequently, the bill was pushed through and cleared swiftly via a voice vote.
