Tax amendment bill passed in Lok Sabha: What changes for UPI transactions, offshore fund norms

The Lok Sabha on 6 August passed a Bill to amend the Payment and Settlement Systems Act, 2007 that authorises the government to permit banks and other service providers to levy charges on payments through unified payments interface (UPI) and other notified electronic payment modes.

The amendment passed by the House without discussion amid protest by Opposition seeks to remove the existing legal provision that prevents banks and payment service providers from charging Merchant Discount Rate (MDR) on notified electronic payment modes.

Real-time payments made through RTGS and NEFT are done by paying a service charge. However, UPI transactions have been exempted from such charges so far.

The government said the Bill is aimed at making India more attractive and predictable place for global capital, manufacturing and business to come and stay.

The Taxation and other Laws (Amendment) Bill, 2026, replaces the June 5 Ordinance that provided I-T exemption to interest income and capital gains made by FPIs from investments in G-Secs.

Through the Bill, the government amended the Payment and Settlement Systems Act, 2007, the Income Tax Act, 2025, and the Finance Act, 2026.

Bill passed with voice vote amid din

The Bill was passed through voice vote in the Lok Sabha after the House resumed at 2 pm after the earlier adjournment on Thursday. As soon as the House re-assembled, Finance Minister Nirmala Sitharaman moved the Taxation and Other Laws (Amendment) Bill, 2026 further to amend the Payment and Settlement Systems Act, 2007 and the Income Tax Act, 2025, and to amend the Finance Act, 2026, to be taken into consideration.

Sitharaman had tabled the Bill in Lok Sabha on 4 August.

The government's approach aims to levy 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 drive the digital payments ecosystem, news agency PTI said

Here are the salient features of the Bill:

Merchant Charges for UPI, Rupay Card Payments

The Bill proposes to remove the linkage between the Payment and Settlement Systems Act and the Income Tax Act, and give a legal backing to the government to modify the zero-MDR framework on UPI and RuPay card transactions, news agency PTI said.

The move could allow merchant charges on selected Unified Payments Interface (UPI) transactions, marking a possible shift from India's zero-charge digital-payment regime.

At present, banks and payment-system providers cannot directly or indirectly charge users for payment made through UPI and RuPay debit cards.

The Bill proposes allowing the central government to decide, through notification, which electronic payment modes or transactions would remain free.

While the Bill itself neither introduces a merchant discount rate (MDR) nor specifies a fee, it creates the legal backing for the government to modify the zero-MDR framework later.

Attracting Foreign Capital

The Bill proposes to make it easier for fund managers to relocate to India by cutting down on the list of conditions that these funds will have to satisfy to ensure that their global income does not get taxed in India, the news agency said.

The expectation is that many managers of global funds will move to India, bringing high value activity and jobs with them. This proposal will apply to the entire country, including International Financial Services Centre, so as to provide flexibility of location to fund managers.

In a relief for investors in business trusts (REITs and InvITs), the Bill proposes to keep dividends tax free even after the operating company shifts to a new and simpler tax regime. The move will protect small investors and give a further push to investment in real estate and infrastructure.

Business trusts pool money from ordinary investors and invest it in real estate and infrastructure through operating companies. The profits flow back to investors as dividends.

Under the present rules, these dividends were tax-free in investors' hands only if the operating company stayed in the old tax regime. As companies increasingly move to the new, simpler tax regime, investors risked losing this benefit.

Simpler rules for data centres

The Bill proposes simpler rules for data centres. The 2026-27 Budget had given tax exemption till 2047 to foreign cloud companies that use Indian data centres, but with conditions of clearing several layers of government notification and approval.

The proposed Bill removes these approval requirements and, importantly, allows Indian data centres to be run on a leased basis rather than only under direct ownership.

The result is a much larger and more flexible ecosystem of Indian data centres serving global cloud players. This reform is expected to help India build large 'AI data cities' and attract significant investment into them.

The Bill replaces the June 5 ordinance that provided I-T exemption to interest income and capital gains made by FPIs from investments in G-Secs.

Tax exemption on foreign diamond miners

The Bill extends tax exemption currently available on income of a foreign company which supplies machinery and tools to an Indian factory that makes electronics on its behalf by another 10 years to 2040-41, PTI said.

The electronic goods covered under the provisions are mobile phones, laptops, personal computers, tablets, servers and their key parts and accessories. This provision is expected to expand the contract manufacturing ecosystem for these products in India.

To shift a meaningful share of the global rough diamond trade to India and to build a financing ecosystem around it, the Bill proposes tax exemption the income of foreign diamond miners and the traders connected with them (i.e.) sight holders, brokers, aggregators and auction houses, from selling rough diamonds in special zones in Mumbai and Surat, for a period of 15 years.

Currently, foreign diamond miners are allowed to only display rough diamonds in special zones in Mumbai and Surat without being taxed. The Bill provision will help turn display into actual trade.

To support component supply for electronics factories, the Bill fully exempts for 15 years the income earned by foreign companies from supplying components, stored in Indian customs-bonded warehouses, to local contract manufacturers. This is expected to strengthen the manufacturing ecosystem for phones, laptops, computers, and servers.

Expert Weighs In

Deloitte India, Partner, Rajesh Gandhi told PTI that the amendment with regard to foreign fund managers could encourage PE firms, funds with master-feeder structures, and offshore funds with a relatively small India corpus to consider shifting their fund management activities to India without creating an adverse tax impact for the fund.

Aditya Bharadwaj, Team Lead, Centre for Law, Policy, and Governance, NFPRC Foundation, told Mint these are largely changes that only prevent harm rather than create anything new.

“Without the amendment, companies may have faced pressure to remain under the older regime solely to preserve tax-efficient dividend distributions, a distortion where tax policy pulled SPVs in two opposite directions. The Bill decouples the two by making the exemption regime-agnostic,” he said.

Foreign investors benefit from the same exemption and from the broader investor-certainty thrust, Bharadwaj said. “The Bill is explicitly pitched at attracting foreign investment and restoring dividend tax neutrality for REIT and InvIT investors. This bill is a continuation of the Government's plans to keep InvITs attractive investment opportunities and to promote them so as to free up financing for newer projects,” he said.

(With PTI inputs)