UPI Charges May Return: Government Introduces New Taxation Amendment Bill In Parliament

The landscape of digital payments in India is poised for a significant transformation as the central government moves to reconsider the current zero-charge framework for UPI transactions. On Tuesday, August 4, Union Finance Minister Nirmala Sitharaman introduced a pivotal piece of legislation in the Lok Sabha titled the Taxation and Other Laws (Amendment) Bill, 2026. This comprehensive bill is designed to replace the Income Tax (Amendment) Ordinance, 2026, and seeks to bring about fundamental changes to several existing laws, including the Payment and Settlement Systems Act (2007), the Income Tax Act (2025), and the Finance Act (2027). The implications of this bill are far-reaching, touching upon everything from daily consumer transactions to international investments and large-scale manufacturing sectors.

The Potential End of Free UPI Transactions

For years, Indian consumers and merchants have enjoyed the convenience of Unified Payments Interface (UPI) without incurring any additional transaction costs. This was made possible by Section 10A of the Payment and Settlement Systems Act, 2007, which strictly prohibited banks and payment system providers from levying any charges, commonly known as Merchant Discount Rate (MDR), on digital payments. However, the new bill proposes the removal of this specific provision. By eliminating the zero-MDR mandate, the government is clearing the path for banks and payment service providers to introduce charges on UPI transactions in the future. The rationale provided for this shift is the need to generate sustainable funds to support the next level of UPI's growth and to strengthen the underlying digital infrastructure that powers millions of transactions daily from small tea stalls to massive shopping malls.

Major Incentives for Foreign Institutional Investors

Beyond digital payments, the bill focuses heavily on boosting the national economy by attracting foreign capital. Through amendments to the Income Tax Act, 2025, the government is offering substantial tax exemptions to Foreign Institutional Investors (FIIs). Under the new proposals, these investors will be completely exempt from paying taxes on interest income and capital gains derived from investments in Government Securities (G-Secs). Plus, the Bank for International Settlements (BIS) will also receive tax relief on its investments in government securities. To further establish India as a global hub for fund management, the bill simplifies the tax structure for eligible investment funds and fund managers, aiming to create a more transparent and accessible environment for international finance.

Boosting Electronics Manufacturing Until 2041

In a bid to solidify India's position as a global electronics manufacturing powerhouse, the bill introduces long-term tax benefits for the sector. A specific category of 'Specified Electronic Goods' has been identified, which includes mobile phones, laptops, tablets, servers, and smart wearables. Companies engaged in the contract manufacturing of these devices will be eligible for tax exemptions extending all the way until the financial year 2041. This relief isn't limited to manufacturers alone; foreign companies maintaining electronic components in custom bonded warehouses will also benefit from these tax holidays until 2041. On top of that, the bill simplifies tax regulations for Indian companies operating leased data centers, a move intended to accelerate the growth of the country's digital and data infrastructure.

Developments in Diamond Trade and Corporate Taxation

The diamond industry, a vital part of India's trade portfolio, is also a major beneficiary of this legislative update. The bill extends the tax exemption period for the sale of rough diamonds by foreign mining companies, siteholders, brokers, and auction houses until March 31 2041. For stock market participants, there is positive news regarding Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The bill relaxes the tax conditions on dividends received by unit holders of these trusts. However, the corporate sector will see a mixed impact. While the surcharge for most domestic companies remains at 10 percent, the government has proposed a significant increase in the surcharge for Special Purpose Vehicles (SPVs) opting for the new tax regime, raising it from 10 percent to 25 percent.