Govt Notifies Charge-Free Payment Modes Under PSS Act

On 14 September 2026, the Department of Financial Services, vide notification bearing no. S.O. 5067(E), specified RuPay debit cards and Unified Payments Interface (UPI) transactions up to Rs. 2,000 as charge-free payment modes under Section 10A of the Payment and Settlement Systems Act, 2007 (PSS Act), thereby prohibiting banks and system providers from imposing any direct or indirect charges on these modes.

Section 10A was amended last month by the Taxation and Other Laws (Amendment) Act, 2026, and the amended provision has been in effect since 17 August 2026. We have discussed this amendment in detail in our previous publication. As amended, Section 10A provides: “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”.

The Government has characterised this amendment as an enabling provision designed to ensure UPI’s long-term sustainability, technological advancement, and resilience against emerging risks. Accordingly, the 14 September 2026 notification prescribes the payment modes that remain charge-free.

In this update, we discuss the background and the legal position before and after the amendment.

Background

Since 2020, UPI’s operating costs have been borne by payment players and, through government subsidy schemes, by taxpayers. The Reserve Bank of India has held consultations on charges, and its Governor has observed that “somebody has to pay” for UPI — an observation consistent with the Government’s stated objective of ensuring UPI’s long-term sustainability. The Forty-Fourth Report of the Standing Committee on Finance (2025-26), presented to Parliament on 12 August 2026, records that the FY 2026-27 Budget Estimate of Rs. 2,000 crore for the RuPay/BHIM-UPI incentive scheme covers, in the Committee’s words, barely 10% of actual operational costs.

Legal position, before and after

Previously, Section 269SU of the Income-tax Act, 1961 (which required businesses above the specified turnover threshold to offer notified electronic payment modes) and Section 10A of the PSS Act (which made those modes charge-free) were introduced together by the Finance (No. 2) Act, 2019 and operated as linked provisions. Pursuant to this framework, CBDT Notification No. 105/2019 dated 30 December 2019 prescribed three electronic modes: (i) Debit Card powered by RuPay; (ii) Unified Payments Interface (UPI) (BHIM-UPI); and (iii) Unified Payments Interface Quick Response Code (UPI QR Code) (BHIM-UPI QR Code). Because Section 10A, as it then stood, cross-referenced Section 269SU, these modes were automatically charge-free under the PSS Act. The rationale for exempting these payment modes from charges, including the Merchant Discount Rate (MDR), was to promote a cashless, digital economy.

Following the enactment of the Taxation and Other Laws (Amendment) Act, 2026, which amended Section 10A of the PSS Act, that link is broken. Businesses will still have to offer systems notified by CBDT (the corresponding provision now being Section 187 of the Income-tax Act, 2025), but the Department of Financial Services will separately determine which systems remain charge-free, as it has done through the 14 September 2026 notification.

MDR framework

On 15 September 2026, the NPCI-led UPI and Services Steering Committee endorsed an MDR framework for select UPI transactions, effective 15 October 2026. The position across transaction categories is as follows:

• Person-to-person (P2P) transactions: free, with no charges for either the sender or the recipient.
• Merchant transactions up to Rs. 2,000: free for all merchants, regardless of size or category.
• Small merchants under the P2PM (Person-to-Person-Merchant) framework: zero MDR on all transactions, subject to monthly inward credits of up to Rs. 1,00,000 and payments received directly into the merchant’s own account.
• Merchant transactions above Rs. 2,000 (general): MDR at 0.40%, subject to a cap of Rs. 300 per transaction (applicable to transactions of Rs. 75,000 and above).
• Industry programme categories (including fuel, railways, insurance, education, utilities, government payments, and others specified by NPCI): flat MDR of Rs. 5 per transaction above Rs. 2,000.
• Capital market transactions (mutual funds, securities, brokers and dealers): MDR at 0.02%, subject to a cap of Rs. 300.

Banks have been advised to ensure that merchants do not pass on MDR charges to customers. UPI app providers are also prohibited from charging platform fees or any other charges on UPI payments. To support small merchants, a dedicated fund is proposed out of the MDR collections, with a contribution of 5% of each entity’s share (excluding industry programme categories). The detailed framework for this fund will be finalised in consultation with the Reserve Bank of India within the next three months. MDR rates and the distribution mechanism are to be reviewed periodically.

Concluding thoughts

With the 14 September 2026 notification, the Central Government has exercised its power under amended Section 10A to specify the electronic payment modes that remain charge-free. The MDR framework that follows marks UPI’s transition from a zero-charge regime to a tiered commercial model, and its implications will need to be closely evaluated.