The government has proposed amendments to the Payment and Settlement Systems Act and related laws to enable Merchant Discount Rate (MDR) on UPI payments for large merchants by allowing the Centre to notify which payment instruments remain exempt from charges.
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KAMAL NARANG
The government has initiated amendments to the existing statutory framework to levy a Merchant Discount Rate (MDR) on UPI payments for large merchants. Simultaneously, to bolster domestic electronics manufacturing and benefit global majors like Apple, the government has proposed a decade-long extension, until 2041, on tax breaks for foreign companies supplying machinery to contract manufacturers.
The proposals are part of the Taxation and Other Laws (Amendment) Bill, which is expected to be tabled in Parliament on Tuesday. Businessline has examined the amendments proposed in the Income Tax Act 2025, the Payment and Settlement Act 2007, and the Finance Act 2026, as well as repealing the Income-tax (Amendment) Ordinance, 2026, to provide tax exemption on interest and capital gains related to G Sec for foreign investors.
Government to notify fee-free payment instruments
The government has introduced amendments to the Payments Regulatory Board/Payments Act framework that would change how fee-free payment instruments are designated. At present, the law effectively prohibits MDR on UPI and RuPay debit card transactions. The proposed amendment would instead empower the Central government to notify which payment instruments will remain exempt from charges, rather than hard-coding the exemption in the law.
The Finance Ministry has proposed repealing the amendment to Section 10A, which mandated that banks and payment companies not levy MDR on UPI payments. MDR is a fee that businesses pay to banks and payment service providers for processing digital transactions. The proposals do not involve charging consumers for using UPI.
“In Clause 2 of the Bill, in the Payment and Settlement Systems Act, 2007, amendment of Section 10 A in order to remove the reference of provision of Income Tax Act and also to provide that no bank or system provider shall impose, whether directly or indirectly, any charge upon a person making or receiving a payment by using one or more electronic modes of payment as may be notified by the central government,” the Bill said.
Tax break extension proposed for electronics manufacturing
To provide certainty to electronic manufacturers, the bill proposes to replace the broad reference to ‘electronic goods’ with a defined list of ‘specified electronic goods’ and extend the tax exemption by ten years up to tax year 2040-41. The exemption will be made available to ‘the contract manufacturer produces specified electronic goods on behalf of the foreign company for a consideration.’ Also, the expression ‘specified electronic goods’ includes mobile phones, laptops, all-in-one personal computers and tablets, servers and ultra small form factor (USFF) or sub-assemblies to the finished goods mentioned.
Published on August 3, 2026
