The year 2025 has unfolded as an action-packed phase for India’s automotive sector, with policy announcements arriving in rapid succession and reshaping the industry’s near-term outlook. As the country accelerates its push for localisation and competes head-to-head with global benchmarks in technology, cost and efficiency amid global supply chain disruptions and geopolitical uncertainties, incentives and regulatory clarity are shaping both investment decisions and product strategies.
It began with a reform-heavy Union Budget that offered income-tax relief to consumers and cut duties on several battery components, giving a push to electrification. Midway through the year, the government unveiled the draft of the next-generation CAFE 3 norms, signalling a sharper turn toward efficiency and cleaner technologies.
While flagship incentive programmes such as PM E-Drive and PLI Auto continue to anchor the industry’s transition, the latest addition this year — a ₹7,280-crore incentive scheme for rare-earth magnets — signals the government’s intent to secure a critical link in the EV and electronics value chain. The most consequential move was made towards the end of the year: GST 2.0 — one of the biggest demand catalysts in recent years — which slashed tax rates on vehicles.
Budget
The year began with a sweeping round of tax relief for the middle class in the Union Budget 2025-26 set the tone for the automobile-related announcements earlier in the year. By exempting individuals earning up to ₹12 lakh annually—₹12.75 lakh for salaried taxpayers after standard deduction—from income tax under the new regime, the budget looked at boosting disposable income in the hands of consumers. Financial experts then estimated that roughly ₹1 lakh crore will flow back to households through these measures, translating into individual savings of up to ₹80,000.
Industry watchers said this boost in purchasing power should help budget-friendly cars and two-wheeler purchases, which had been struggling due to rising ownership costs.
Alongside the consumption push, the budget had announcements for lithium-ion battery and EV component makers. In a bid to boost domestic production of lithium-ion batteries for electric vehicles, the government fully exempted basic customs duty on 35 additional capital goods used in their manufacturing. The customs duty has also been removed on waste and scrap of lithium-ion batteries, cobalt powder, lead, zinc, and several other critical minerals—including cobalt and copper—previously taxed between 2.5% and 10%.
Meanwhile, the Budget also reduced the duty on motorcycle imports across categories: for sub-1600cc models, CBU duty dropped from 50% to 40%, SKD from 25% to 20%, and CKD from 15% to 10%. Larger motorcycles see even steeper cuts, bringing CBU duty down to 30%. This lowered the prices of premium bikes at a time when larger performance and luxury bikes are gaining traction.
Incentive Schemes
Among the most high-profile announcements was the Scheme to Promote Manufacturing of Electric Passenger Cars in India (SPMEPCI), introduced with considerable anticipation and widely viewed as a potential pathway to attracting global EV majors, including Tesla.
This scheme offers the option to import a limited number of CBUs at a sharply reduced duty rate in exchange for firm commitments to invest and begin manufacturing in India. Yet, the programme has found no takers. With the application window closing in October without a single OEM applying, industry observers point to concurrent free trade agreement negotiations with Europe and the US as a key factor behind the muted response.
A similar slowdown has clouded the PLI ACC scheme, launched in 2021 with a ₹18,100-crore outlay to build 50 GWh of advanced battery capacity by December 2024. Progress has been far off target — only 1.4 GWh was in place by June this year. The government has reportedly issued notices to all three beneficiaries for failing to meet mandated timelines, seeking penalties for non-compliance.
India-UK FTA
India and the UK’s Free Trade Agreement signed in July is set to boost India’s automotive sector, opening up fresh avenues for exports, investment, and technology collaboration. With tariff barriers set to ease and supply chain integration expected to deepen, the Indian automotive sector is gearing up to tap into the UK market.
The deal centred on gradually opening India’s tightly protected import regime while offering new export opportunities for Indian EV makers. For internal combustion engine (ICE) vehicles, the agreement lays out a detailed, phased tariff-reduction roadmap. India’s import duties—ranging from 66% to 110% depending on engine size—will be gradually reduced to as low as 10% over a period of five years once the FTA is effective.
The treatment of alternative-fuel vehicles is far more protective. The UK will eliminate import duties on Indian EVs from year six, opening a new export channel for Indian manufacturers. Taken together, the agreement brings carefully moderated market access, significant long-term tariff reductions, and a reciprocal boost for India’s EV exports—setting the stage for a more competitive but still protected transition in the automotive trade between the two countries.
CAFE 3 Draft
Among the most consequential regulatory developments this year is the revised draft of the Corporate Average Fuel Economy (CAFE 3) norms—rules that reshape how automakers plan their future product mix. Unlike per-model limits, CAFE norms measure the sales-weighted average CO₂ emissions across a manufacturer’s entire fleet, pushing companies to balance higher-emitting vehicles with more efficient or zero-emission options. The revised proposal tightens these fleet-wide requirements further from April 2027 but also introduces targeted relief and new compliance tools that could shift industry strategy.
For India’s cost-sensitive small-car segment, the draft offers a crucial breather. Petrol vehicles under 4 metres, with engines up to 1,200 cc and weighing up to 909 kg, can claim an additional 3 g CO₂/km reduction in their declared performance—capped at 9 g/km per model each year.
The draft acknowledges the limited scope for further efficiency improvements in such compact petrol vehicles. Yet industry executives caution that despite this relaxation, the overall regime is still tightening sharply. Emission limits are estimated to begin at 88.4 g CO₂/km in 2027-28 and then fall progressively, making annual compliance and product planning more challenging than before.
The draft also lays out a powerful push for cleaner technologies, with range-extender hybrids (REEs) emerging as a key beneficiary. These vehicles run primarily on battery power, with a small engine that activates only to recharge the battery—or, in some designs, assist in driving the wheels.
Under the credit system, both battery electric vehicles and REEs will count as three vehicles in fleet-average calculations. This multiplier strengthens the case for range-extender hybrids as a practical bridge technology for manufacturers looking to offset emissions from larger or more popular ICE models.
A second major structural shift is the introduction of emissions pooling. Up to three OEMs can now form a compliance pool, whose combined sales and emissions will be treated as a single fleet.
This mechanism opens the door to strategic alliances—allowing companies with complementary line-ups to balance their averages, share compliance burdens and reduce potential penalties. With tighter limits ahead and annual adjustments becoming the norm, pooling could become a critical tool for manufacturers navigating the demanding CAFE 3 landscape.
ABS for 2Ws
In a major regulatory change for two-wheelers, the Ministry of Road Transport and Highways has introduced one of the most significant safety updates in recent times. A new draft notification proposes mandatory Anti-lock Braking Systems (ABS) for all two-wheelers manufactured from January 1, 2026, alongside a requirement for OEMs to supply two helmets with every new vehicle sold.
The move marks a major shift for lower-capacity scooters and motorcycles, which currently rely on Combined Braking Systems (CBS). ABS, a system that prevents wheel lock during sudden or hard braking, helps riders maintain control—particularly on slippery or uneven surfaces. While this technology has been compulsory for models above 125 cc, extending it to all L2-category two-wheelers signals the government’s intent to standardise a higher level of road safety across the board.
According to the draft, “vehicles of category L2 manufactured on and after January 1, 2026, shall be fitted with Anti-lock Braking System conforming to the IS14664:2010,” covering the entire mass-market spectrum. For consumers, the changes go beyond braking technology. The notification also requires manufacturers to provide two BIS-certified helmets at the time of purchase, instead of the single helmet currently mandated. This measure recognises the reality of Indian roads, where a pillion rider is present as often as the driver and equally vulnerable in the event of a crash.
However, these safety interventions come with cost implications. Adding ABS hardware and two certified helmets is expected to increase the price of entry-level two-wheelers—a segment that has already been struggling to recover. Manufacturers will have to balance the regulatory mandate with consumer sensitivity to price hikes, especially in the budget commuter market.
Ethanol Blending
The government rolled out the 20% ethanol blending mandate during the year, setting off some concerns among consumers, especially owners of older vehicles who worry about mileage drops, engine wear and the possibility that damage from higher ethanol blends may not be covered under warranty.
The government has attempted to calm these fears, stating that claims of a “drastic” mileage drop are misplaced and that any reduction for older vehicles has been marginal. Tests by ARAI, IIP and Indian Oil, it says, show no abnormal wear-and-tear, while routine servicing can address minor issues such as gasket or rubber part replacement. SIAM has also stepped in to assure that manufacturers will honour warranties for older vehicles using E20, regardless of manual specifications.
After crossing the 20% ethanol-blending milestone, automakers and sugar manufacturers are now urging the government to prioritise flex-fuel vehicles – which can run on higher blends and 100% ethanol—instead of incrementally moving to 25% or 30% blends. They want lower taxes on these vehicles and a clear pricing advantage for ethanol over petrol. With surplus ethanol capacity and flex-fuel hybrids delivering lower well-to-wheel emissions, industry players argue that this shift offers India a practical route to reducing both its oil import bill and carbon footprint.
GST 2.0
The biggest development of the year, without a doubt, was the decision to overhaul GST rules for the automobile sector—cutting tax rates across cars, two-wheelers and a host of related vehicles and components. Under the revised policy announced in September 2025 by the Goods and Services Tax Council, GST on small cars has been slashed from 28% to 18%. This reduction covers cars with petrol engines under 1,200 cc and length under 4 metres, and diesel cars under 1,500 cc and under 4 metres — bringing down the cost of entry-level four-wheelers for first-time buyers and middle-class households.
For larger cars and SUVs, the earlier cess-based rates have been replaced by a flat GST rate of 40%, while the removal of the cess makes pricing simpler and more predictable. Turning to two-wheelers, the GST rate for bikes up to 350 cc has also been reduced, falling from 28% to 18%. This cut has made scooters and entry-level motorcycles more affordable, boosting demand especially in semi-urban and rural areas.
The tax rationalization has to stimulate demand across the automotive ecosystem — benefiting manufacturers, component suppliers and dealers alike — while making mobility more accessible for millions of Indians. The short term was evident in the peak festival season sales, where all the segments hit record sales this year.