A proposed amendment quietly shifts the power to define 'free' payments from Parliament to the Cabinet — and that subtle change could upend the economics of India's ₹314 lakh crore payments network.
On August 4, 2026, fintech stocks did something unusual: they went up on regulatory news. Pine Labs rose 9.68%, Paytm gained 2.63%, AvenuesAI jumped 11.02%, and MobiKwik climbed 4.66% — all before Parliament had debated the bill that caused the excitement. The market had read the fine print before the politicians had.
What they were pricing in was a single clause buried inside the Taxation and Other Laws (Amendment) Bill, 2026: a quiet legal rewiring that could mean, for the first time since January 2020, that someone pays for your UPI transaction. Not you, the sender. But someone.
To understand what's changing, you need to know how zero-MDR happened in the first place.
MDR — Merchant Discount Rate — is the fee a business pays its bank every time a customer swipes a card or taps a QR code. Think of it as the operating cost of accepting digital payments. Before 2020, NPCI had stipulated an MDR of up to 0.30% of transaction value for UPI person-to-merchant (P2M) transactions. Modest by global standards, but a real cost for a kirana store owner doing ₹5,000 a day through PhonePe.
Then, in a bid to turbocharge digital adoption after demonetisation, MDR was made zero for RuPay Debit Cards and BHIM-UPI transactions from January 2020, through amendments to Section 10A of the Payment and Settlement Systems Act, 2007. That move hard-coded the exemption into statute. It wasn't a policy directive that some bureaucrat could quietly modify — it required Parliament to change it.
The result was spectacular adoption. UPI transactions grew from 1,207 million in FY18 to over 97,000 million in FY24, and the network kept accelerating. In FY26, there were 241.6 billion transactions worth ₹314 lakh crore in total. By volume, UPI now handles nearly half of all real-time payment volume on the planet.
Zero MDR deserves significant credit for this. But here's the uncomfortable arithmetic the industry has been quietly raising for years: someone was always paying for "free."
The proposed amendment, listed for introduction in Parliament on August 5, 2026, does something legally precise: it moves the exemption from a hard rule into a soft power.
The new bill would shift the power to notify which digital payment methods remain free of charges from the statute itself to the Central government. The bill explicitly states that no bank or payment system provider may levy charges on electronic payment modes as notified by the Central Government — meaning the government decides, by notification, what stays free and what doesn't.
The Bill does not specify fees, rates, or a timeline for any payment instrument. The prohibition on charging fees for instruments such as UPI remains unchanged — for now. What changes is the architecture. Instead of Parliament having to act to impose an MDR, the government could, in theory, notify a change without returning to the legislature. It's the difference between a locked gate and a gate that only the Cabinet holds the key to.
The Finance Ministry has simultaneously proposed repealing the relevant amendment to Section 10A of the Payment and Settlement Systems Act. In plain language: the statutory prohibition on MDR is being dismantled. Whether and when the government uses the new power is a separate question.
The case for some form of MDR has been building quietly for years. The government's solution to zero-MDR was a compensation scheme — pay banks a subsidy for processing transactions for free. The numbers tell a story of gradual retreat.
Sources: PIB, Business Standard
The pattern: budget low, face industry fury, revise upward. And each time, the industry argued the revised figure still wasn't close to reality. The Department of Financial Services told a Parliamentary committee that this scheme covers only 11% of actual industry costs — and just 14% of the MDR revenue the industry forgoes under current policy.
Industry estimates put the real subsidy requirement at ₹4,000–5,000 crore a year just to cover P2M transaction costs. The government is currently funding about half that, in a good year. Banks face a particular squeeze: they are processing millions of UPI transactions daily, under continuous pressure from the government and NPCI to keep scaling infrastructure, without a proportionate return on that investment.
The math is not sustainable. NPCI itself operates as a not-for-profit and survived on a surplus of just ₹1,552 crore in FY25 (per NPCI's published annual accounts) — in a network processing the equivalent of over $3 trillion in annual transactions.
This is where the debate gets interesting, because the proposal is not about charging you ₹2 when you split a dinner bill with friends.
Industry body PCI chairman Vishwas Patel wrote to the PMO in March 2025 proposing a nominal MDR for RuPay debit cards and UPI — but only for large merchants, explicitly noting that such merchants already pay MDR on other payment modes. The Payments Council of India's proposal: an MDR of 0.3% (30 basis points) on UPI P2M transactions for merchants with annual turnover above ₹20 lakh, while smaller merchants and P2P transfers remain zero-charge.
Think of it as three tiers:
The logic: large merchants already pay MDR on Visa and Mastercard credit card transactions — adding a modest fee on UPI P2M won't shock them. And if the government were to set a rate at, say, 5–7 basis points (0.05–0.07%), it would be far below the 0.9% that debit card networks historically charged, and well below even the PCI's proposed 30 bps.
The argument for keeping zero MDR isn't just economic — it's electoral.
Digital payments are a flagship government achievement, and zero-fee UPI is something hundreds of millions of users actively value. Any policy reversal carries real political risk. This is not a hypothetical: the government has chosen to revise subsidy allocations upward every single time rather than face the optics of charging users.
There's also a counterintuitive adoption argument. Brazil's Pix and China's real-time payment systems carry merchant charges, yet both have achieved over 90% penetration across users and merchants — compared to roughly 35–40% in India, according to reports published by the RBI and NPCI. The world's two closest analogues to UPI charge a fee and are more penetrated than India's free system.
That's a striking data point, but it doesn't settle the argument. Brazil and China had higher baseline digital infrastructure and formal financial inclusion before their systems scaled. India's zero-MDR was, at least partly, a deliberate accelerant for a less mature market. The honest question now is whether that acceleration is complete.
A Parliamentary Committee has also recommended restoring MDR for large merchants, lending the proposal cross-party institutional weight beyond industry lobbying alone.
The fintech market's reaction on August 4 wasn't irrational. A potential MDR on UPI could bring direct revenue relief to payment infrastructure companies such as PhonePe and Razorpay, both of which are in the process of launching IPOs.
PhonePe is the dominant player on the network by volume — commanding a 45.35% share as of December 2025, with Google Pay at 34.6% and Paytm at 7.65%, together accounting for approximately 87.6% of UPI transaction volume. Right now, processing those billions of transactions earns them essentially nothing directly from P2M routing. Revenue comes from adjacent products — insurance, credit, gold. Even a thin MDR would transform the unit economics of that core business.
UPI processes over 66 crore transactions every single day. At zero revenue per transaction, that's 66 crore reasons to keep lobbying Parliament.
Tucked into the same bill, almost as a footnote, is a provision that matters enormously to India's electronics-factory ambitions.
India introduced a tax exemption for foreign companies in February 2026, valid until 2031, after Apple lobbied the government to modify income tax rules. The problem the exemption solves is subtle but significant: Apple feared that ownership of high-end iPhone machinery supplied to its contract manufacturers — Foxconn in Tamil Nadu, Tata in Karnataka — could be treated as a "business connection" under Indian tax law, potentially exposing its iPhone profits to Indian income tax.
That's a dealbreaker for serious manufacturing commitment. Assembly plants often run on equipment owned by a foreign parent, and without an exemption, that arrangement can trigger a tax charge in India — the kind of friction that makes a CFO think twice about where to put a production line.
The February 2026 exemption fixed this, but only until 2031. That's too short a horizon to justify the multi-thousand-crore investments Apple and its suppliers are contemplating. The new draft extends those tax breaks to March 31, 2041.
The extended exemption covers manufacturers of mobile phones, tablets, laptops, hearing devices, and wearable electronics. It also exempts foreign companies' income from storing and supplying components used in manufacturing such devices to contract manufacturers until 2041. The rule applies to factories and warehouses in customs-bonded areas — technically outside India's customs border — making these zones attractive primarily for exports rather than domestic sales.
The stakes are not trivial. According to Counterpoint Research, India is expected to manufacture 26% of the world's iPhones in 2026, up from just 6% four years ago. Extending the exemption to 2041 turns a short-term concession into something a CFO can build a decade of capital expenditure around. As Riaz Thingna of Grant Thornton Bharat put it, the measure enables foreign companies to "store and transfer critical equipment and components in India for their contract manufacturers, helping mitigate supply chain disruptions... while providing greater tax certainty." The certainty, more than any single year's tax saving, is the point.
Both provisions are, at their core, the same kind of bet: India is willing to forgo revenue today in exchange for infrastructure that generates far more value later.
With the electronics manufacturing break, the logic is explicit. Give Apple a long-term tax guarantee, get a global supply chain anchored in Tamil Nadu and Karnataka. The revenue forgone is bounded and the target — becoming China's manufacturing successor — is measurable.
With UPI, it's the reverse gear of the same logic. The government spent six years forgoing MDR revenue via subsidies to build the world's largest real-time payments network. Digital transactions in India rose nearly eleven times between 2021 and 2025, with UPI accounting for 80% of that volume. The network is built. The question is whether it's now mature enough to generate its own economics.
The bill doesn't answer that directly. It just moves the decision from Parliament's hands to the Cabinet's. The actual rate, the merchant turnover threshold, the exemption categories — all decided later, by notification.
Watch two numbers when that notification comes. First, the merchant turnover threshold: the higher it is, the fewer merchants are affected and the smaller the revenue pool. Second, the basis points. If the government notifies 5–7 bps on large merchants, that's a calibrated first step. If it approaches 30 bps — the full rate the PCI has proposed — that's a different conversation.
The number that will matter most is the one that isn't in the bill yet.