- The Taxation Laws Amendment Bill replaces the existing statutory reference linking no-charge protection for UPI transactions to modes prescribed under the Income-tax Act, 1961, empowering the Central Government to specify protected electronic modes by notification.
- Parliament's passage of the Bill paves the way for possible Merchant Discount Rate (MDR) charges on UPI transactions, as the government gains flexibility to determine which electronic payment modes remain protected from charges.
- The existing Section 10A of the Payment and Settlement Systems Act, 2007 currently prohibits any charges on payments made through electronic modes prescribed under Section 269SU of the Income-tax Act, 1961.
- The Bill also amends the Income-tax Act, 2025 to rationalise conditions for eligible investment funds and their fund managers, aiming to promote fund management activity in India and provide tax certainty.
- It introduces tax exemptions for interest and capital gains from Government securities for specified Foreign Institutional Investors and the Bank for International Settlements, and provides a 15-year tax exemption for income from sale of rough diamonds by specified foreign companies.
- The legislation provides tax relief for foreign companies storing components in custom bonded warehouses for supply to Indian contract manufacturers producing specified electronic goods, with the exemption available up to the tax year ending March 31, 2041.
Parliament's recent passage of the Taxation Laws Amendment Bill empowers the Central Government to define protected UPI payment modes, raising concerns about potential future charges.1
The Rajya Sabha approved the Bill, which amends the legal framework for electronic payments, allowing the government to specify which modes remain free from charges.
Finance Minister Nirmala Sitharaman assured that UPI transactions would remain free for consumers, stating, "The amendment should not be interpreted as imposing a charge or tax on UPI transactions."
However, the amendment removes the statutory link to the Income-tax Act, 1961, which previously protected certain electronic payment modes from charges.
This change could lead to a Merchant Discount Rate (MDR) framework, where merchants bear transaction costs instead of consumers.2
Section 10A of the Payment and Settlement Systems Act, 2007 currently prohibits banks from imposing charges on electronic payments, but the amendment allows the government to redefine protected modes.3
The Bill also includes provisions for tax exemptions for foreign investors and companies involved in electronic manufacturing and diamond sales, aiming to promote fund management and investment in India.56
The legislation reflects a significant shift in the regulatory landscape for digital payments, with implications for both consumers and merchants in the evolving financial ecosystem.
“The Bill removes the statutory link to Income-tax Act, 1961, giving the Centre flexibility to decide which electronic modes stay charge-free. It also amends the Income-tax Act, 2025 to rationalize fund manager conditions and offers a 15-year tax exemption for rough diamond sales by foreign firms.”
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