The Lok Sabha passed a Bill to amend the Payment and Settlement Systems Act, 2007, authorising the government to permit banks and other service providers to levy charges on UPI Transaction and other notified electronic payment modes.

Key Highlights

• Lok Sabha passed a Bill enabling the government to permit merchant charges on UPI and RuPay transactions.
• Bill also eases rules for foreign fund managers, data centres, and extends electronics manufacturing tax exemptions to 2040-41.

The amendment Bill, passed by the House without discussion amid protests by the Opposition, seeks to remove the existing legal provision that currently prevents banks and payment service providers from charging a Merchant Discount Rate (MDR) on notified electronic payment modes. Real-time payments made through RTGS and NEFT already attract a service charge, but UPI transactions have so far remained exempt from such fees.

The government said the Bill is aimed at making India a more attractive and predictable destination for global capital, manufacturing and business. The Taxation and Other Laws (Amendment) Bill, 2026 also replaces the June 5 ordinance that had provided income-tax exemption on interest income and capital gains earned by Foreign Portfolio Investors (FPIs) from investments in government securities (G-Secs). Through this Bill, the government has amended the Payment and Settlement Systems Act, 2007, the Income Tax Act, 2025, and the Finance Act, 2026.

Bill Passed Through Voice Vote Amid Opposition Protests

The Bill was passed by voice vote in the Lok Sabha after the House resumed at 2 pm, following an earlier adjournment on Thursday. As soon as the House reassembled, Finance Minister Nirmala Sitharaman moved the Taxation and Other Laws (Amendment) Bill, 2026 for consideration, having originally tabled it in the Lok Sabha on August 4.

According to PTI, the government's approach aims to levy a small charge on digital payment services for consumers and small businesses, while ensuring a sustainable revenue model for banks, payment service providers (PSPs) and payment infrastructure firms that support the digital payments ecosystem.

Merchant Charges on UPI and RuPay Card Payments

The Bill proposes removing the linkage between the Payment and Settlement Systems Act and the Income Tax Act, giving the government legal backing to modify the existing MDR on UPI and RuPay card transactions. This could pave the way for merchant charges on select UPI transactions, marking a potential shift away from India's current zero-charge digital payments regime.

At present, banks and payment system providers cannot directly or indirectly charge users for payments made via UPI or RuPay debit cards. The Bill proposes empowering the central government to decide, through notification, which electronic payment modes or transactions will remain free of charge. While the Bill itself does not introduce an MDR or specify a fee, it creates the legal framework for the government to modify the zero-MDR structure at a later stage.

Reforms to Attract Foreign Fund Managers

The Bill also proposes making it easier for global fund managers to relocate to India by reducing the list of conditions such funds must satisfy to ensure their global income is not taxed in India. The move is expected to encourage many global fund managers to shift operations to India, bringing high-value activity and jobs with them - a provision applicable across the country, including the International Financial Services Centre, to offer fund managers greater location flexibility.

In a relief for investors in business trusts such as REITs and InvITs, the Bill proposes keeping dividends tax-free even after the underlying operating company shifts to the new, simplified tax regime - protecting small investors and encouraging continued investment in real estate and infrastructure.

Simpler Rules Proposed for Data Centres

The Bill also proposes simplifying rules for data centres. While the 2026-27 Budget had already granted tax exemption until 2047 to foreign cloud companies using Indian data centres, this benefit came with multiple layers of government notification and approval requirements. The new Bill removes these approval requirements and, notably, allows Indian data centres to operate on a leased basis rather than requiring direct ownership - a change expected to help India build large "AI data cities" and attract significant investment into the sector.

Also Read: FM Sitharaman Presents Tax Amendment Bill 2026: Key Details

Extended Tax Exemptions for Electronics Manufacturing and Diamond Trade

The Bill extends the existing tax exemption available to foreign companies supplying machinery and tools to Indian electronics contract manufacturers by another 10 years, through to 2040-41. This covers electronic goods including mobile phones, laptops, personal computers, tablets, servers and their key components, with the aim of expanding India's contract manufacturing ecosystem for these products.

To help shift a greater share of the global rough diamond trade to India, the Bill proposes a 15-year tax exemption for foreign diamond miners and connected traders - including sightholders, brokers, aggregators and auction houses - on income from selling rough diamonds through special zones in Mumbai and Surat. Currently, foreign diamond miners are only permitted to display rough diamonds in these zones without being taxed; the new provision would allow this display activity to convert into actual trade.

To further support the electronics manufacturing ecosystem, the Bill also fully exempts, for 15 years, income earned by foreign companies supplying electronic components stored in Indian customs-bonded warehouses to local contract manufacturers.

Rajesh Gandhi, Partner at Deloitte India said, "The amendment relating to foreign fund managers could encourage private equity firms, funds with master-feeder structures, and offshore funds with relatively small India-linked corpuses to consider shifting their fund management activities to India without triggering adverse tax consequences."

Abheet Sachdeva, Partner - M&A Tax at Nangia Globa stated, "The changes are expected to significantly enhance the attractiveness of India's onshore fund management ecosystem for offshore funds and facilitate greater relocation of fund management activities to India."