Lok Sabha passes tax Bill that could end UPI’s free transaction model for merchants; rules eased for data centres
Finance Minister Nirmala Sitharaman had tabled the Bill on August 4. It replaces an ordinance issued on June 5 that had extended income-tax exemptions to foreign portfolio investors on returns from government securities
- Aug 7, 2026,
- Updated Aug 7, 2026 9:36 AM IST
India's zero-cost UPI regime may not stay that way. The Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026 on August 6, a legislation that, among other things, removes the legal firewall preventing banks and payment service providers from charging merchants for UPI and RuPay card transactions. The Bill went through on a voice vote amid Opposition protests, without any floor discussion.
Finance Minister Nirmala Sitharaman had tabled the Bill on August 4. It replaces an ordinance issued on June 5 that had extended income-tax exemptions to foreign portfolio investors on returns from government securities.
What changes for UPI
Under the current framework, banks and payment providers are legally barred from levying any direct or indirect charges on UPI or RuPay debit card transactions. The new legislation breaks the link between the Payment and Settlement Systems Act and the Income Tax Act that had locked in this zero-charge model.
The Bill does not itself introduce any merchant discount rate or specify a fee. What it does is give the central government the legal authority to decide, through notification, which electronic payment modes or transactions will continue to be free of charge. The door to merchant charges is now open; whether and when it swings depends on future government decisions.
The stated intent is to build a sustainable revenue model for banks, payment service providers, and the infrastructure companies that underpin the digital payments ecosystem, while keeping any charges on consumers and small businesses modest.
Easier for foreign fund managers to come to India
The Bill also tries to make India a more viable base for global fund managers by reducing the conditions that offshore funds must satisfy to avoid having their worldwide income taxed in India. Expectations are that fund managers running global portfolios will now have more reason to relocate, bringing high-value work and employment with them. The relaxation applies across the country, including the International Financial Services Centre, giving fund managers flexibility in where they set up.
Deloitte India Partner Rajesh Gandhi told PTI that this change could encourage private equity firms, funds with master-feeder structures, and offshore funds with a relatively limited India exposure to consider shifting their fund management operations to India without triggering adverse tax consequences for the fund itself.
Abheet Sachdeva, Partner for M&A Tax at Nangia Global, said the changes are expected to make India's onshore fund management ecosystem significantly more attractive for offshore funds and make it easier for fund management activity to shift to India.
Relief for REIT and InvIT investors
The Bill also protects small investors in business trusts, structures that pool money into real estate and infrastructure assets through operating companies. Under existing rules, dividends flowing back to investors were tax-free only if the operating company remained in the older tax regime. As more companies move to the newer, simpler tax structure, investors were at risk of losing that benefit. The Bill ensures dividends remain tax-free even when the underlying company makes the switch, shielding ordinary investors from an unintended consequence of tax regime changes.
Data centres and AI infrastructure
The 2026-27 Budget had offered tax exemptions to foreign cloud companies using Indian data centres until 2047, but the conditions attached, multiple layers of government approvals and notifications, made them difficult to use. The Bill strips out those approval requirements and, critically, allows Indian data centres to operate on a lease basis rather than requiring direct ownership. The result is expected to be a far larger and more flexible network of Indian data centres serving global cloud providers, with significant implications for India's ambition to build large-scale AI infrastructure.
Diamond trade and electronics manufacturing
To pull a larger share of global rough diamond trading to India, the Bill extends tax exemptions to foreign diamond miners and associated traders, including sight holders, brokers, aggregators, and auction houses, selling rough diamonds in designated zones in Mumbai and Surat for a period of 15 years. Currently, foreign miners can only display rough diamonds in these zones without tax liability. The Bill allows actual trade to take place, to make India a genuine hub for rough diamond commerce and build a financing ecosystem around it.
On electronics manufacturing, the Bill extends an existing tax exemption on income earned by foreign companies supplying machinery and tools to Indian contract manufacturers of mobile phones, laptops, computers, tablets, servers, and related components by another decade to 2040-41.
(With inputs from PTI)
India's zero-cost UPI regime may not stay that way. The Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026 on August 6, a legislation that, among other things, removes the legal firewall preventing banks and payment service providers from charging merchants for UPI and RuPay card transactions. The Bill went through on a voice vote amid Opposition protests, without any floor discussion.
Finance Minister Nirmala Sitharaman had tabled the Bill on August 4. It replaces an ordinance issued on June 5 that had extended income-tax exemptions to foreign portfolio investors on returns from government securities.
What changes for UPI
Under the current framework, banks and payment providers are legally barred from levying any direct or indirect charges on UPI or RuPay debit card transactions. The new legislation breaks the link between the Payment and Settlement Systems Act and the Income Tax Act that had locked in this zero-charge model.
The Bill does not itself introduce any merchant discount rate or specify a fee. What it does is give the central government the legal authority to decide, through notification, which electronic payment modes or transactions will continue to be free of charge. The door to merchant charges is now open; whether and when it swings depends on future government decisions.
The stated intent is to build a sustainable revenue model for banks, payment service providers, and the infrastructure companies that underpin the digital payments ecosystem, while keeping any charges on consumers and small businesses modest.
Easier for foreign fund managers to come to India
The Bill also tries to make India a more viable base for global fund managers by reducing the conditions that offshore funds must satisfy to avoid having their worldwide income taxed in India. Expectations are that fund managers running global portfolios will now have more reason to relocate, bringing high-value work and employment with them. The relaxation applies across the country, including the International Financial Services Centre, giving fund managers flexibility in where they set up.
Deloitte India Partner Rajesh Gandhi told PTI that this change could encourage private equity firms, funds with master-feeder structures, and offshore funds with a relatively limited India exposure to consider shifting their fund management operations to India without triggering adverse tax consequences for the fund itself.
Abheet Sachdeva, Partner for M&A Tax at Nangia Global, said the changes are expected to make India's onshore fund management ecosystem significantly more attractive for offshore funds and make it easier for fund management activity to shift to India.
Relief for REIT and InvIT investors
The Bill also protects small investors in business trusts, structures that pool money into real estate and infrastructure assets through operating companies. Under existing rules, dividends flowing back to investors were tax-free only if the operating company remained in the older tax regime. As more companies move to the newer, simpler tax structure, investors were at risk of losing that benefit. The Bill ensures dividends remain tax-free even when the underlying company makes the switch, shielding ordinary investors from an unintended consequence of tax regime changes.
Data centres and AI infrastructure
The 2026-27 Budget had offered tax exemptions to foreign cloud companies using Indian data centres until 2047, but the conditions attached, multiple layers of government approvals and notifications, made them difficult to use. The Bill strips out those approval requirements and, critically, allows Indian data centres to operate on a lease basis rather than requiring direct ownership. The result is expected to be a far larger and more flexible network of Indian data centres serving global cloud providers, with significant implications for India's ambition to build large-scale AI infrastructure.
Diamond trade and electronics manufacturing
To pull a larger share of global rough diamond trading to India, the Bill extends tax exemptions to foreign diamond miners and associated traders, including sight holders, brokers, aggregators, and auction houses, selling rough diamonds in designated zones in Mumbai and Surat for a period of 15 years. Currently, foreign miners can only display rough diamonds in these zones without tax liability. The Bill allows actual trade to take place, to make India a genuine hub for rough diamond commerce and build a financing ecosystem around it.
On electronics manufacturing, the Bill extends an existing tax exemption on income earned by foreign companies supplying machinery and tools to Indian contract manufacturers of mobile phones, laptops, computers, tablets, servers, and related components by another decade to 2040-41.
(With inputs from PTI)