I. Legislative Background

The Income-tax Act, 2025, which came into force on 1st April 2026, consolidated and amended the law relating to income-tax in India. However, evolving geopolitical developments and disruptions in international trade and supply chains created significant global economic uncertainty, necessitating urgent taxation measures to mitigate external economic shocks, stabilise the domestic economy, and support affected sectors. To this end, the President promulgated the Income-tax (Amendment) Ordinance, 2026 on 5th June 2026. The legislation was subsequently enacted to replace the Ordinance and incorporate further amendments aimed at providing ease of doing business and tax certainty.

Initial reporting on the 2026 Act led to misinterpretation, with many incorrectly concluding that all UPI transactions would henceforth attract charges. To address these concerns, the Central Government released a detailed press note on 8th August 2026, clarifying that UPI transactions between individual users and smaller merchants would remain free of charge.

II. The Pre-Amendment Framework: Section 10A and Section 269SU

Section 269SU of the Income-tax Act, 1961 mandated businesses above a specified turnover to accept payments through notified electronic modes. Section 10A of the Payment and Settlement Systems Act, 2007 (“Act”), in turn, prohibited banks and system providers from imposing charges on these notified modes. Both provisions were introduced together by the Finance (No. 2) Act, 2019, and functioned as linked provisions: the Department of Revenue’s notification of payment systems under Section 269SU automatically made them charge-free under Section 10A of the Act. Prior to the amendment, Section 10A read as follows:

“Notwithstanding anything contained in this Act, no bank or system provider shall impose, whether directly or indirectly, any charge upon a person making or receiving a payment by using the electronic modes of payment prescribed under section 269SU of the Income-tax Act, 1961.”

Invoking powers under Section 269SU of the Income-tax Act, 1961, the Central Government issued Notification No. 105/2019 dated 30th December 2019, classifying the following as protected electronic modes of payment:

1. Debit Cards powered by RuPay;
2. Unified Payments Interface (UPI) / BHIM-UPI; and
3. UPI Quick Response Code (UPI QR Code) / BHIM-UPI QR Code.

The rationale for exempting these payment modes from charges, including the Merchant Discount Rate (“MDR”), was to promote a cashless, digital economy. This zero-MDR framework enabled users to make and accept digital payments without bearing additional costs—unlike the pre-existing ecosystem where different digital payment instruments carried varying cost structures. Consequently, UPI gained significant traction as a cost-free alternative to both cash and other digital payment instruments, driving its widespread adoption.

III. The Amendment: Delinking Section 10A from Section 269SU

The 2026 Act amends Section 10A of the Act to read as follows:

“Notwithstanding anything contained in this Act, 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 the Central Government may, by notification, specify.”

Through this amendment, the Central Government effectively transfers the classification power from the repealed Income-tax Act, 1961 to the Payment and Settlement Systems Act, 2007. Since the Income-tax Act, 1961 stands repealed, the government was required to issue a fresh notification listing the electronic payment modes covered under Section 10A. Rather than linking to the new Income-tax Act, 2025, the government has wisely placed the empowering provisions within the Payment and Settlement Systems Act itself. It is therefore incorrect to characterise the 2026 Act as removing statutory protection; it merely enables the government to issue a fresh notification under the Payment and Settlement Systems Act rather than linking to income-tax law.

A critical point overlooked in public discourse is that the Central Government’s power to specify electronic payment modes through notification is not new. Even under the now-repealed Section 269SU, the protected payment modes were those “prescribed” by the Central Government through notification. Notification No. 105/2019 dated 30th December 2019 was one such prescription.

IV. The Notification Power: Continuity, Not Change

In other words, the government always possessed the executive discretion to determine which payment modes would be exempt from charges. The 2026 Act merely transfers this notification power from the Income-tax Act framework to the Payment and Settlement Systems Act framework—a more appropriate legislative home for provisions governing payment infrastructure.

V. No Real Reason for Public Concern

Given this continuity of notification power, there is no real reason for public panic. The fundamental structure of the regulatory framework remains unchanged: the Central Government retains the authority to specify which electronic payment modes are protected from charges, and the Central Government retains the authority to modify this list as circumstances evolve. This was true under Section 269SU, and it remains true under the amended Section 10A.

The Central Government, through its clarifications dated 8th August 2026, has categorically stated that a vast majority of transactions will remain free of charge. Specifically:

• Consumers shall bear no charges or costs while making payments;
• No charges shall be levied on transactions between two individuals;
• Most transactions will remain free of charge for merchants; and
• A nominal MDR would only be imposed where transactions exceed a specified threshold—to be determined by an NPCI-led UPI and Services Steering Committee yet to be constituted.

Any MDR, if introduced, would apply only to a limited category of merchant transactions above the specified threshold at rates lower than current credit and debit card charges.

The only substantive change is the legislative location of this power—not its existence or scope. The government’s clarifications dated 8th August 2026 further reinforce this position. The public concern, while understandable given the initial reporting, is therefore misplaced when examined against the actual legal framework.

That said, the Central Government could have been more effective in its communication. While the clarifications dated 8th August 2026 addressed the immediate concerns, the government failed to articulate the most fundamental point: that there is no real change in law in substantive terms. The notification power that existed under Section 269SU has simply been relocated to Section 10A of the Payment and Settlement Systems Act. Had this been communicated clearly from the outset—that the amendment is a legislative housekeeping measure necessitated by the repeal of Section 269SU rather than a policy shift towards imposing charges—much of the public anxiety could have been avoided. The lesson for future legislative communications is clear: when amending interconnected statutes, the continuity of underlying regulatory powers must be explicitly highlighted to prevent misinterpretation.

VI. Why the Amendment is Legally Appropriate

Critically, with the repeal of the Income-tax Act, 1961 and its replacement by the Income-tax Act, 2025, Section 269SU ceased to exist in the statute books. This created an untenable situation: Section 10A of the Act was entirely dependent on Section 269SU for its operative effect. A statutory provision cannot meaningfully function by referencing a repealed section. An argument to the contrary would be that Section 10A could have been amended to reference a corresponding provision under the Income-tax Act, 2025, thereby maintaining the cross-statutory linkage. However, this approach would be legally and structurally flawed.

First, the delinking of the Act from the Income-tax Act represents sound legislative policy. The two statutes serve fundamentally different regulatory purposes—income taxation versus payment infrastructure regulation. The original linkage created unnecessary interdependence. The 2026 Act now grants the Central Government flexibility to adapt the MDR framework to evolving economic realities without requiring frequent parliamentary amendments, while ensuring that payment system regulation is governed within its own legislative framework.

Second, even assuming such a provision were enacted, the alternative approach would expose Section 10A to the vagaries of future income-tax reforms. Any subsequent amendment, repeal, or renumbering of the referenced provision would again render Section 10A inoperative or uncertain, recreating the very problem the 2026 Act seeks to resolve.

From a legislative drafting standpoint, the 2026 Act is not merely appropriate but necessary. Leaving Section 10A unamended or amending it by having another cross-statutory linkage would have created legal uncertainty regarding which payment modes remained protected. The 2026 Act ensures the Act remains a self-contained, operative statute rather than depending on external legislative references that no longer exist.

The 2026 Act therefore represents not merely a legally appropriate response to the repeal of Section 269SU, but a correction of a pre-existing legislative anomaly. By housing the notification power within the Payment and Settlement Systems Act itself, Parliament has ensured that payment infrastructure regulation is no longer hostage to unrelated developments in income-tax law.

VII. UPI: A Transformative Public Utility

The contribution of UPI to the Indian economy cannot be overstated. Since its launch in 2016, UPI has revolutionised the payments landscape, processing billions of transactions monthly and becoming the backbone of India’s digital economy. UPI has democratised access to digital payments, enabling even the smallest street vendors and rural merchants to participate in the formal financial ecosystem without requiring expensive point-of-sale infrastructure. This has significantly advanced the government’s financial inclusion objectives and brought millions of previously unbanked or underbanked citizens into the mainstream economy.

From the banking sector’s perspective, UPI has substantially eased operations and reduced costs. The shift from cash-based transactions to digital payments has decreased the operational burden associated with cash handling, transportation, storage, and reconciliation. Banks have benefited from reduced footfall at physical branches for routine transactions, lower currency management costs, and improved transaction visibility. The digital trail created by UPI transactions has also enhanced transparency and reduced the shadow economy, indirectly benefiting the formal banking system.

It is pertinent to note that the National Payments Corporation of India (“NPCI”), which operates UPI, is a not-for-profit entity co-owned by a consortium of major banks in India. The banks that would ostensibly seek to levy charges on UPI transactions are, in fact, the very stakeholders who own NPCI. This ownership structure creates an inherent alignment of interests: the banks benefit immensely from the cost savings generated by reduced cash handling and the broader digitalisation of the economy that UPI facilitates. The indirect economic benefits accruing to banks through UPI—including reduced operational costs, enhanced customer acquisition, cross-selling opportunities, and improved data analytics—arguably outweigh any potential revenue from MDR charges.

VIII. RuPay: India’s Strategic Payment Independence

RuPay—India’s indigenous card payment network launched by NPCI in 2012—addresses critical concerns arising from India’s historical dependence on international payment networks like Visa and Mastercard. Prior to RuPay, Indian card transactions were processed predominantly through these foreign networks, creating structural dependency on foreign payment rails, foreign exchange outflows, and vulnerabilities to geopolitical pressures. In an era where international payment networks can be weaponised through sanctions or service disruptions arising from diplomatic tensions, RuPay provides India with a fully operational domestic alternative that routes transactions entirely within India’s domestic banking infrastructure, ensuring that payment data remains within national boundaries and the system can continue functioning regardless of international developments.

From an economic standpoint, RuPay retains processing revenues within the Indian economy and reduces transaction costs. International card networks typically charge higher interchange and cross-border fees ultimately borne by merchants and consumers; RuPay’s domestic processing model eliminates these foreign exchange components, with savings particularly meaningful for smaller merchants operating on thin margins.

IX. Recommendation: Retain UPI as a Free Public Digital Utility

In light of the foregoing, the Central Government’s clarifications dated 8th August 2026—confirming that consumers and small merchants will not bear charges—represent a sound policy position that merits entrenchment. UPI has transcended its original role as a mere payment mechanism—it has become critical public infrastructure, akin to roads and railways, that underpins economic activity across the nation. While the 2026 Act creates an enabling provision that grants future governments discretion to modify this position, there is a strong case for formalising the current commitment through notification, thereby insulating price-sensitive consumers and small merchants from potential policy shifts.

To ensure long-term sustainability of the UPI ecosystem without passing costs on to end-users, the government should consider alternative models—such as budgetary support, cross-subsidisation from high-value commercial transactions above the specified threshold, or incentivising banks through other fiscal mechanisms. UPI’s success has positioned India as a global leader in real-time digital payments, and several countries are now seeking to replicate or adopt this model. Preserving UPI as a free, universally accessible service for consumers and small merchants would not only honour the government’s stated commitment but also enhance India’s soft power and technological leadership on the world stage.

X. Conclusion

In conclusion, the amendment to Section 10A does not seek to impose blanket charges on UPI transactions. Rather, it creates an enabling provision that permits the introduction of a nominal MDR in the future, should circumstances warrant. The Government bears an obligation to ensure the long-term sustainability of the UPI ecosystem, which has grown exponentially and now underpins a significant portion of India’s digital economy. This necessitates a viable revenue model for payment service providers and intermediaries—one that ensures continued technological innovation, maintenance, and security of UPI infrastructure. At the same time, the Government has an equal obligation to maintain critical payment infrastructure like UPI and RuPay as accessible public utilities, ensuring that consumers are not adversely impacted.

Keeping these two competing obligations in mind, the Government should exercise the powers conferred by the amended Section 10A responsibly and ensure that all regular UPI and RuPay transactions remain free for consumers and small merchants.