Lok Sabha Passes Taxation Bill Allowing Government to Permit Fees on UPI and Electronic Payments

New Delhi

The Lok Sabha has passed the Taxation and Other Laws (Amendment) Bill, 2026, which includes significant updates to the Payment and Settlement Systems Act, 2007. Passed via a voice vote without debate amidst Opposition protests, the new legislation gives the Central Government the authority to specify electronic payment methods—including the Unified Payments Interface (UPI)—where banks and service providers may levy charges.

The amendment targets the existing legal prohibition against charging a Merchant Discount Rate (MDR) on digital payments. The goal is to build a sustainable revenue model for banks, payment service providers (PSPs), and fintech infrastructure companies while maintaining digital adoption.

Key Highlights of the Bill

1. Digital Payments & MDR Charges

• Legal Shift: Amends Section 10A of the Payment and Settlement Systems Act, removing the absolute ban on charging fees for specified electronic payment modes (including RuPay debit cards and BHIM-UPI).
• Controlled Pricing: Empowers the Central Government to notify which digital payment modes may carry small transaction fees for consumers and businesses.
• Industry Context: While digital payment platforms like RTGS and NEFT carry service fees, UPI had remained entirely free. RBI Governor Sanjay Malhotra recently noted that funding digital payment infrastructure requires sustainable backing, though immediate fee implementation details remain under review.

2. Manufacturing & Electronics Boost

• Contract Manufacturing Relief: Extends Income Tax exemptions until 2040–41 for foreign firms that hire Indian contract manufacturers to build electronic hardware (smartphones, laptops, servers, and parts).
• Supply Chain Support: Offers a 15-year tax exemption (up to 2040–41) for international companies storing component inventory in Indian customs warehouses for domestic electronics assembly.

3. Data Centers & Investment Incentives

• Cloud & Data Policy: Streamlines setup for foreign cloud providers operating in Indian data centers by removing complex approval hurdles and allowing leased data center operations.
• FPI Ordinance Replacement: Replaces the June 5 ordinance offering Income Tax exemptions on interest and capital gains for Foreign Portfolio Investors (FPIs) in Government Securities (G-Secs), while easing conditions for overseas fund managers relocating to India.