JSA Prism | FinTech | September 2026

Please click here to download the Prism as a PDF.

Understanding the new Merchant Discount Rate Framework under the Payment and Settlement Systems Act, 2007

The Unified Payments Interface (“UPI”) is now India’s leading system for digital retail payments. In August 2026 alone, UPI processed around 2,451 crore (two thousand four hundred and fifty-one crore) transactions worth approximately INR 29 lakh crore (Indian Rupees twenty-nine lakh crore), making it the world’s largest real-time payment system. The scale has been supported, in part, by the zero-charge framework that applied to UPI payments[1].

The Taxation and Other Laws (Amendment) Act, 2026 (“Amendment Act”) received Presidential assent on August 17, 2026[2]. Section 2 of the Amendment Act changed section 10A of the Payment and Settlement Systems Act, 2007 (“PSS Act”), which deals with charges on specified electronic payment modes[3].

Two important developments have followed the amendment. First, on September 14, 2026[4], the Central Government issued a notification under Section 10A of the PSS Act protecting RuPay debit card payments and UPI transactions up to INR 2,000 (Indian Rupees two thousand) from these charges. Second, on September 15, 2026, National Payments Corporation of India (“NPCI”) issued a circular[5] for UPI ecosystem participants introducing the framework for levying and distribution of Merchant Discount Rate (“MDR”) on specified transactions (“Framework”)[6], after which NPCI released Frequently asked Questions (“FAQs”)[7]. The Ministry of Finance also issued a clarification on the Framework on the same date[8]. The Framework takes effect from October 15, 2026.

Framework before the amendment

Before the amendment took effect, section 10A of the PSS Act stated that “no bank or system provider[9] could, directly or indirectly, charge a person making or receiving a payment through electronic payment modes prescribed under section 269SU of the Income Tax Act, 1961[10].”

Rule 119AA of the Income-tax Rules, 1962 prescribed the following electronic payment modes for the purposes of section 269SU of the Income Tax Act, 1961:

• RuPay debit cards;
• UPI or Bharat Interface for Money (“BHIM-UPI”); and
• UPI Quick Response (“QR”) code or BHIM-UPI QR code.

This meant that Section 10A statutorily prohibited charges on UPI. The Central Board of Direct Taxes had also clarified in 2019 that no charge, including MDR, would apply to payments made through these prescribed modes from January 1, 2020[11].

What is the amendment?

The amendment to section 10A of the PSS Act gives the Central Government the power to decide, by notification, which payment modes get statutory protection from charges. Earlier, section 10A of the PSS Act protected the payment modes ‘prescribed under section 269SU of the Income-tax Act, 1961’. Section 2 of the Amendment Act replaced that reference with: “one or more electronic modes of payment as the Central Government may, by notification, specify”.

The basic prohibition in section 10A of the PSS Act remains the same: a bank or system provider cannot directly or indirectly impose a charge on a person making or receiving a payment through a protected mode. What has changed is how the Central Government identifies the protected modes.

In simple terms, the Central Government can now decide, by notification, which electronic payment modes receive the statutory zero-charge protection under section 10A of the PSS Act. The Government exercised this power through a notification, dated September 14, 2026. It specifies: (a) debit cards powered by RuPay; and (b) UPI transactions up to INR 2,000 (Indian Rupees two thousand). The notification also repeats the statutory rule that “no bank or system provider shall impose, whether directly or indirectly, any charge” on a person making or receiving payment through those specified modes.[12]

The amendment changes the legal structure of the zero-charge regime. Earlier, section 10A of the PSS Act automatically followed the payment modes prescribed under section 269SU. Now, the Central Government can specify the protected modes directly by notification. Previously, the Central Board of Direct Taxes prescribed those modes under the income tax laws. The Central Government can now set that scope directly under the PSS Act, administered by the Department of Financial Services.

MDR is generally the charge paid by a merchant for processing a digital payment. The Government had until now followed a zero-MDR policy for UPI while separately providing incentives to other touchpoints of the payment ecosystem to support the cost of processing low-value UPI transactions. The notification now preserves the statutory prohibition on charges for any UPI transactions up to INR 2,000 (Indian Rupees two thousand). Transactions above INR 2,000 (Indian Rupees two thousand) are outside that section 10A protection and the Framework determines whether MDR applies to such transactions.

What does this mean in practice?

From October 15, 2026

No MDR

• Any Peer to Peer (“P2P”) transactions, regardless of the amount will continue to not attract MDR.
• Any Peer to Merchant (“P2M”) transactions below INR 2,000 (Indian Rupees two thousand) will continue to not attract MDR.
• Small merchants (example: street vendors, neighbourhood shops and other small businesses) receiving up to INR 1,00,000 (Indian Rupees one lakh) per month through UPI QR codes under the Person to Person Merchant (“P2PM”) category will continue to have zero MDR. If such a merchant receives more than INR 1,00,000 (INR one lakh) inward payments per month for 3 (three) continuous months, they will be transitioned to the P2M category (see below).
• Autopay transactions (recurring transactions) through UPI will not carry MDR.

MDR

• P2M transactions in excess of INR 2,000 (Indian Rupees two thousand) may attract MDR of 0.4%. For P2M transactions of INR 75,000 (Indian Rupees seventy-five thousand) and above, the MDR is capped at INR 300 (Indian Rupees three hundred) per transaction.
• Transactions above INR 2,000 (Indian Rupees two thousand) in specified essential and thin-margin sectors, including railways, telecommunications, insurance premium payments, fuel and agricultural inputs, will attract a flat MDR of INR 5 (Indian Rupees five) per transaction.
• Capital market transactions, including payments relating to mutual funds, securities and stockbrokers, will attract MDR of 0.02%, capped at INR 300 (Indian Rupees three hundred) per transaction.

The Government has also clarified that MDR is a merchant-side payment processing charge, not a tax or a charge on customers. It has advised banks to ensure that merchants do not pass MDR on to customers, and prohibits UPI application providers from imposing platform fees or hidden charges on users.

There is an important legal distinction here. As noted above, Section 10A’s statutory protection applies only up to INR 2,000 (Indian Rupees two thousand) and the Framework governs transactions above that. However, this does not mean that every UPI transaction above INR 2,000 (Indian Rupees two thousand) will be charged. The Framework (for now) keeps all P2P transactions free and applies MDR only to specified P2M transactions, with separate exemptions and concessional rates.

The Ministry of Finance has stated that approximately 96% of P2M transactions will remain unaffected because they are either below the INR 2,000 (Indian Rupees two thousand) threshold or fall within the zero-MDR framework for small merchants. The Government has also stated that the Framework followed deliberations by the UPI Steering Committee.^[13]

Why is the amendment significant?

This change is significant because UPI now accounts for a very large share of India’s digital payments. A February 2026 study released by the Department of Financial Services noted that UPI’s share of total digital transactions had increased to around 80% between 2021 and 2025.^[14]

A zero-MDR framework helps users and small merchants accept digital payments at low cost. At the same time, banks, payment service providers and UPI application providers incur costs for technology, cybersecurity, processing and customer support. The Framework seeks to address both sides. It keeps UPI free for individuals and most merchant payments, while allowing a limited MDR on specified higher-value merchant transactions.

Conclusion

An important starting point is that the statutory protection under section 10A of the PSS Act and the Framework are separate instruments and should be read independently. The notification defines which payments are shielded by statute, while the Framework determines how MDR applies to merchant payments that fall outside that shield. Against this background, the key considerations for different participants in the UPI ecosystem are set out below:

• Consumers and P2P users: Individuals do not pay MDR for using UPI. All person-to-person transfers remain free irrespective of value. MDR is a merchant side payment processing charge, not a tax or a charge on customers. The Government has advised banks to ensure that merchants do not pass MDR on to customers, and UPI application providers are prohibited from imposing platform fees or hidden charges on users.
• Banks and system providers: These entities are directly subject to section 10A of the PSS Act. They must continue to ensure that they impose no direct or indirect charge on payments that fall within the modes notified under section 10A. Banks and system providers will need to contractually ensure and monitor that merchants do not pass on MDR to consumers.
• Merchants: Merchants should identify whether they fall within the zero-MDR small merchant category (i.e., those receiving up to INR 1,00,000 (Indian Rupees one lakh) per month through UPI QR codes under the P2PM category) or a sector-specific concessional category under the operational framework. They should then assess how the standard 0.4% MDR applies to their transactions above INR 2,000 (Indian Rupees two thousand) from October 15, 2026. Merchants should also assess applicability of goods and services tax and input tax credit.
• Fintechs, PSPs and UPI application providers: The effect on each participant will depend on its role and regulatory status under the PSS Act and the NPCI Framework. The Ministry of Finance has stated that MDR will be distributed among payment ecosystem participants, including banks, payment service providers and UPI application providers.

The position may continue to evolve through further NPCI, RBI or Government directions. Payment businesses should therefore track any operational circulars dealing with implementation, classification of merchants and allocation of MDR within the payment ecosystem.

This Prism has been prepared by:

Sajai Singh Partner

Kavya Gupta Principal Associate

Ayush Sahay Associate

Adarsh Tripathi Junior Associate

For more details, please contact km@jsalaw.com

[1] https://www.pib.gov.in/PressReleasePage.aspx?PRID=2296594&reg=48&lang=2; See also NPCI FAQs on MDR

[2] The Taxation and Other Laws (Amendment) Act, 2026 (Act No. 21 of 2026), Gazette of India, August 17, 2026.

[3] Section 10A of the PSS Act prohibits banks and system providers from directly or indirectly charging a person making or receiving payment through the electronic modes specified by the Central Government.

[4] Ministry of Finance (Department of Financial Services), Notification S.O. 5067(E), dated September 14, 2026, issued under section 10A of the PSS Act, Gazette ID CG-DL-E-14092026-276170, available at: https://egazette.gov.in/WriteReadData/2026/276170.pdf

[5] NPCI Circular No. NPCI/UPI/OC-No.237/2026-27, dated September 15, 2026

[6] ‘Framework’ herein, refers to the NPCI Circular No. NPCI/UPI/OC-No.237/2026-27, introduced by NPCI on September 15, 2026 for levy and distribution of MDR on specified UPI P2M transactions.

[7] NPCI, FAQs on MDR on Select UPI (P2M) Transactions, dated September 15, 2026, available at: https://www.npci.org.in/uploads/FA_Qs_Merchant_Discount_Rate_MDR_on_Select_UPI_P2_M_Transactions_58dba1d39e.pdf

[8] Ministry of Finance, UPI Continues to Remain Free for Peer to Peer Transactions and 96% of Merchant Transactions, Press Information Bureau, September 15, 2026, available at:

[9] A system provider under the PSS Act is a person who runs an authorised payment system.

[10] Section 269SU of the Income Tax Act, 1961 relates to acceptance of payment through prescribed electronic modes. Every business with a total turnover, sales, or gross receipts exceeding INR 50,00,00,000 (Indian Rupees fifty crore) in the previous financial year must offer prescribed electronic payment options to its customers.

[11] CBDT Circular No. 32/2019 dated December 30, 2019

[12] Ministry of Finance (Department of Financial Services), Notification S.O. 5067(E), September 14, 2026; Gazette ID CG-DL-E-14092026-276170

[13] Ministry of Finance, “UPI Continues to Remain Free for Peer to Peer Transactions and 96% of Merchant Transactions”, Press Information Bureau, September 15, 2026: https://www.pib.gov.in/PressReleaseDetail.aspx?PRID=2310586&reg=48&lang=1

[14] Department of Financial Services study referred to in PIB release dated February 2026: https://www.pib.gov.in/PressReleasePage.aspx?PRID=2228651&lang=1&reg=3