GST on Cars in India 2025: New Tax Rates, Calculation and Impact

Explore new GST on cars in India. Reform 2.0 cuts taxes, removes cess and makes pricing transparent for buyers and businesses.
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GST on cars
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3 min
10 September 2025

The Goods and Services Tax (GST) revolutionized automobile taxation in India by consolidating multiple taxes like excise duty and VAT into a single system. Launched in 2017, GST simplified compliance and pricing, benefiting both manufacturers and consumers. With the introduction of GST Reform 2.0 in September 2025, the government has further refined the tax structure—reducing the rate for small cars to 18%, imposing 40% on other vehicles, and maintaining a concessional 5% rate for electric vehicles. The removal of the cess has made pricing more transparent and vehicle ownership more affordable. This article covers the updated car GST rates, their impact on the industry, and the advantages for buyers, providing key insights for both consumers and automotive professionals.

What is GST on cars?

The Goods and Services Tax (GST) on vehicles is a unified indirect tax applied to the manufacture, sale, and consumption of goods and services across India. In the automobile sector, this system transformed vehicle taxation in India by replacing the earlier complex structure of multiple taxes such as excise duty, VAT, and various state-level levies. Launched on July 1, 2017, GST aimed to simplify and unify the taxation process for vehicles. Over the years, the GST impact on car prices has been significant, influencing both affordability and consumer demand. With the introduction of GST 2.0 on September 3, 2025, the government has further streamlined the tax structure for cars to enhance affordability and improve tax administration.

New GST rates on cars in India

GST Reform 2.0 has streamlined the tax structure for most cars into two primary rates: 18% for small cars and 40% for all other vehicles, while maintaining a low rate for electric vehicles (EVs). The additional cess has been completely removed for these categories, simplifying tax calculations and lowering the overall tax burden on consumers.

Type of Vehicle

Previous GST + Cess

Total Tax Rate (Old)

New GST Rate (Effective Sept 22, 2025)

Total Tax Rate (New)

Small Cars (Petrol <1200cc & length <4m)

28% GST + 1% Cess

29%

18%

18%

Small Cars (Diesel <1500cc & length <4m)

28% GST + 3% Cess

31%

18%

18%

Mid-sized Cars (<1500cc & length >4m)

28% GST + 17% Cess

45%

40%

40%

Luxury Cars (>1500cc & length >4m)

28% GST + 20% Cess

48%

40%

40%

SUVs (>1500cc, length >4m, ground clearance >170mm)

28% GST + 22% Cess

50%

40%

40%

Hybrid Cars (Engine >1200cc Petrol, >1500cc Diesel)

28% GST + 15% Cess

43%

40%

40%

Electric Vehicles

5% GST + 0% Cess

5%

5%

5%

Ambulances & 3-Wheelers

28% GST + 0% Cess

28%

18%

18%


To explore the reforms that GST introduced, check out the features of GST.

How does GST impact car prices, its benefits, issues to be resolved

GST impacts car prices directly by adding a tax to the vehicle’s price. In 2025, GST rates on small petrol and diesel cars were reduced from 28% to 18%, lowering the price for buyers. This means you pay less when buying smaller, everyday cars. Electric vehicles enjoy a low GST of only 5%, encouraging cleaner choices. Even things like insurance and road tax, which are based on the car's value, become cheaper because the GST cut lowers the car’s price.

The benefits to you include more affordable car prices and smaller monthly EMIs if you take a car loan. However, bigger and luxury cars still face a high 40% GST, making them expensive for many. Also, imported cars have extra taxes. These areas need improvement for fairer pricing. Overall, GST helps make car ownership easier and more affordable in India.

Impact of GST on the cars industry

The implementation of GST has brought a significant transformation to the automobile industry, made even more efficient by the recent GST reforms. The complex, cascading tax system of the past has been replaced with a simpler structure. The elimination of compensation cess on most vehicles and the rationalisation of tax rates are expected to lower prices, directly benefiting consumers.

  • Small Cars: The reduction of total tax from 29-31% to a uniform 18% is a major development. This is likely to drive higher demand in the entry-level segment, making cars more affordable for a broader audience.
  • Luxury Vehicles and SUVs: Although the headline GST rate has increased to 40% from 28%, the removal of the substantial compensation cess (up to 22%) effectively reduces the overall tax burden. This also simplifies the tax framework and resolves classification issues.
  • Supply Chain Efficiency: The unified GST regime continues to enhance logistics and supply chain operations by removing state-level taxes and checkpoints, thereby cutting transit times and lowering costs for manufacturers and dealers.
  • Promotion of EVs: The GST rate on electric vehicles remains steady at a low 5%, providing a strong incentive to encourage the adoption of cleaner, environmentally friendly transportation options.

GST calculation on cars after the new tax structure

Under the updated GST structure effective from September 22, 2025, car taxation in India has been simplified with the removal of compensation cess and the introduction of just two major GST slabs — 18% and 40%, while electric vehicles continue at 5%.​

Updated GST rates on cars (2025)

Category

Criteria

New GST rate

Old effective rate (with cess)

Small cars — petrol, CNG, LPG

Up to 1200cc & ≤4000mm length

18%

29% (28% + 1%) ​

Small cars — diesel

Up to 1500cc & ≤4000mm length

18%

31% (28% + 3%) ​

Large/Luxury cars and SUVs

Above small car limits

40%

43–50% (28% + 15–22% cess) ​

Electric vehicles

Any capacity

5%

5% (unchanged) ​


Stepwise GST calculation with formula

Formula:

Example 1: Small Diesel Car (under 1500cc)

  1. Ex-showroom Price = ₹6,00,000
  2. GST rate = 18%
  3. Total Tax = ₹6,00,000 × 18% = ₹1,08,000
  4. Final Price = ₹6,00,000 + ₹1,08,000 = ₹7,08,000

Example 2: Luxury SUV (above 1500cc)

  1. Ex-showroom Price = ₹50,00,000
  2. GST rate = 40%
  3. Total Tax = ₹50,00,000 × 40% = ₹20,00,000
  4. Final Price = ₹50,00,000 + ₹20,00,000 = ₹70,00,000

Notes

  • The cess component has been fully removed, leading to reduced prices across small and mid-size car segments.​
  • The on-road price will also drop since charges like road tax and insurance are percentage-based on the ex-showroom amount.​
  • Electric vehicles continue enjoying the lowest 5% GST rate, encouraging green mobility.​

Using an online GST car price calculator simplifies this process, giving quick results for total tax and final invoice value as per the new system.

Exemptions for GST on car after reform 2.0

GST 2.0 has maintained the existing GST exemptions for certain vehicle categories:

  • The concessional GST on EV cars remains at 5%, continuing to encourage clean energy adoption and sustainability in the automobile sector.
  • Ambulances: The tax rate has been lowered from 28% to 18%, acknowledging their critical role in healthcare.
  • Vehicles for the Physically Challenged: These vehicles remain exempt from GST, with government-defined criteria to ensure mobility aids are more affordable.

Conclusion

GST 2.0 has brought a major transformation to automobile taxation in India. By streamlining the tax structure into simpler slabs and eliminating the complex cess, the government has enhanced transparency and predictability. These changes are set to make small cars more affordable, stimulate demand in the mass market, and sustain growth in the electric vehicle sector. For businesses, especially those looking at financing options, understanding GST’s effect on pricing and costs is crucial. In such scenarios, opting for a business loan can be a practical way to manage cash flow and invest in new vehicles. As the unified GST framework continues to develop, it is shaping the future of India’s automobile industry.

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Frequently asked questions

What is the GST rate for SUVs?

The GST rate for SUVs above 1200 cc petrol or 1500 cc diesel, and luxury SUVs, is 40%. Smaller SUVs with engine and length below limits attract 18% GST.

How is GST calculated on cars?

GST on cars is calculated as a percentage of the ex-showroom price. The rate depends on the car's engine size, fuel type, and length, and is added to the vehicle’s base price.

How much is GST on cars below INR 10 lakh?

Cars priced below INR 10 lakh and with engines within small car limits generally attract an 18% GST rate, resulting in lower overall taxes.

Which cars will be cheaper after GST reform?

Smaller petrol, diesel, CNG, and hybrid cars with engines up to 1200 cc (petrol) or 1500 cc (diesel) will be cheaper due to reduced GST rates from 28% to 18%.

What is the GST on cars above 10 lakhs?

Cars priced above 10 lakhs, if they are classified as luxury vehicles or larger SUVs, now fall under the 40% GST rate as per the new structure introduced in 2025.

GST included in the ex-showroom price of cars?

The ex-showroom price of a car always includes GST. However, it does not cover additional charges like insurance, registration, or road tax, which are calculated separately.

How does GST reduction affect car insurance premiums?

A lower GST rate reduces a car’s ex-showroom price, resulting in a lower insured declared value (IDV). This can also bring down comprehensive insurance premium costs for new vehicles.

What GST rates apply to electric and hybrid vehicles?

Electric vehicles benefit from a concessional 5% GST, while smaller hybrid cars are usually taxed at 18%. Larger or luxury hybrid vehicles attract a 40% GST rate.

How do GST changes affect road tax and on-road price?

Lower GST rates lead to reduced ex-showroom prices, which in turn decrease both road tax and insurance premiums. As a result, the on-road price becomes more affordable for buyers.

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