The new law enables a flexible UPI fee framework designed to strengthen payment infrastructure without disrupting everyday users
NEW DELHI: The Lok Sabha passed the Taxation and Other Laws Amendment Bill 2026 on August 6, quietly introducing a significant shift in how India funds its digital payments infrastructure. Tucked within this broader tax legislation is an amendment to the Payment and Settlement Systems Act that gives the government flexibility to permit calibrated charges on UPI transactions, moving away from the rigid zero-cost mandate that has governed India’s payments ecosystem since 2020.
This is an important evolution for what has become one of the world’s most successful digital payment systems. Rather than an abrupt policy reversal it represents a considered response to UPI’s own extraordinary success, the network now processes over 10 billion transactions monthly, a scale that demands a more sustainable funding model than annual government subsidies alone can provide.
Solving a Real Infrastructure Funding Gap
The zero-MDR mandate introduced in 2020 played a crucial role in getting UPI off the ground, eliminating the cost barrier that once discouraged small merchants from adopting digital payments. However, industry analysis has consistently shown that processing UPI transactions carries real costs, estimated at around 0.25% of transaction value, while government subsidies covered only a fraction of this expense. This structural gap meant banks and payment providers had limited capacity to invest in the security upgrades, server capacity and fraud prevention tools needed to keep pace with UPI’s explosive growth.
By creating a legal pathway for calibrated fee structures the amendment directly addresses this shortfall, giving financial institutions a sustainable revenue stream to reinvest in the infrastructure millions of Indians now depend on daily.
Built-In Flexibility to Protect Small Merchants
Importantly this is not a blanket removal of free UPI access. The amendment simply shifts the decision-making power to the central government through executive notification, meaning any fee structure introduced can be precisely calibrated rather than applied uniformly. RBI Governor Sanjay Malhotra himself noted that discussing immediate MDR implementation remains premature, signalling a careful, deliberate approach rather than a rushed rollout.
Industry consultations and RBI’s own prior research point toward a thoughtfully tiered model, with strong indications that small merchants earning under ₹20 lakh annually and everyday small-ticket transactions under ₹2,000 would likely retain zero-cost status entirely. This kind of targeted protection would preserve exactly what made UPI transformative for India’s informal economy, free digital acceptance for neighbourhood vendors and small traders, while introducing sustainable pricing only where larger enterprises can reasonably absorb it.
Stronger Infrastructure Benefits Everyone
A well-funded payments system ultimately serves users better. Reliable transaction revenue would allow banks and payment providers to invest in the kind of real-time fraud detection, biometric authentication and server redundancy that reduces failed transactions and protects against the rising sophistication of digital payment scams. For the millions of Indians who rely on UPI daily, a more resilient backend translates directly into fewer failed payments and faster dispute resolution, tangible improvements to everyday experience.
A Model Aligned With Successful Global Systems
India’s approach also reflects lessons from other successful instant payment systems worldwide. Brazil’s Pix system, often cited as a global benchmark, remains free for individual consumers while charging a modest average merchant fee of around 0.22%, a model that has kept the system both accessible and financially sustainable. India’s calibrated approach appears designed along similar lines, preserving consumer-facing benefits while introducing reasonable, capped merchant fees that fund long-term system health.
A Thoughtful Transition for a Mature System
What makes this shift encouraging is its timing and framing. UPI has already achieved its foundational mission of driving mass digital adoption and reducing cash dependency across India. Having proven that success, transitioning toward a more commercially sustainable model, similar to how mature infrastructure in telecom and energy sectors eventually shifts from subsidy-driven expansion to market-based operation, is a natural and healthy next step rather than a step backward.
What Comes Next
The specific fee structures, exemption thresholds and implementation timeline will now depend on forthcoming government notifications, expected to emerge through careful consultation with the Reserve Bank of India, NPCI and industry stakeholders. Given the clear signals already emerging around protecting small merchants and everyday transactions, India’s payments ecosystem looks well positioned to enter this next phase without disrupting the accessibility that made UPI a genuine success story for financial inclusion worldwide.
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