GST Rate Cut for Cars (Effective September 2025)

The government has clarified that the new car GST rate will apply across categories. Different slabs will be applicable for small cars, luxury cars, hybrids, and electric vehicles. 

As per the reform, smaller vehicles will attract lower GST rates. Larger and premium models are subject to higher rates, often with an added cess. From 22 September 2025, a new GST regime for cars will come into effect, eliminating the GST compensation cess. 

Removing the cess represents a significant shift in tax policy, paving the way for a more transparent and business-friendly regime. It is likely to reduce costs for buyers and lead to a subsequent increase in demand. 

The new GST on cars brings a more structured tax system. While small cars now enjoy reduced rates, luxury and high-end vehicles face higher duties. Below is an overview as per the vehicle category. 

• GST on Small Cars and Hatchbacks 

GST on small cars and hatchbacks has been reduced from 28% to 18%, making them more affordable. 

This category covers petrol cars of less than 1200 cc and diesel cars of less than 1500 cc, both with a length not exceeding 4 metres. The reduction aims to encourage first-time buyers and increase household mobility. 

With the new rate of 18%, sales in smaller towns and cities where compact cars dominate are expected to rise. It can also benefit car dealerships and finance companies by boosting demand and making car ownership easier. 

• GST on Sedans and Midsize Cars 

GST on sedans and midsize cars, especially those up to 1500 cc in the 4-meter-plus segment, has undergone a notable change. GST on these cars up to 1500 cc has been revised from 28% plus 17% cess (total 45%) to a flat 40%. 

Although the GST rate appears higher, the removal of the cess reduces the effective tax burden, providing buyers with approximately 5% relief.

This change benefits popular models such as the Volkswagen Virtus, Skoda Slavia, and Maruti Ertiga. By removing cess and simplifying rates, the government has made midsize cars more affordable. It also ensures a stable, predictable tax regime for manufacturers and consumers. 

• GST on SUVs and Luxury Cars

SUVs and luxury cars have been placed under the new 40% GST slab, replacing the earlier 28% rate plus a hefty cess. 

This shift simplifies the tax structure by removing the cess, making the system more transparent and predictable. Although the GST rate seems higher, the overall tax burden decreases due to the removal of the cess.

It impacts premium brands such as Mercedes, BMW, Audi, and high-end SUVs that carry a heavier tax load. By standardising GST at 40%, the government aims to strike a balance, offering marginal relief to buyers. 

The removal of cess also ensures stability for manufacturers and clarity for consumers, boosting demand in the premium car segment. 

• GST on Electric Vehicles (EVs) 

Electric vehicles (EVs) continue to enjoy a concessional GST rate of 5%, which remains unchanged under the new reform. This preferential rate is expected to boost cleaner transportation and support eco-conscious buyers. By keeping EV taxes low, the policy ensures adoption across both personal and commercial segments. 

In addition to vehicles, the GST on EV chargers and charging stations has also been reduced from 18% to 5%. It removes uncertainties about future tax hikes and also supports India’s broader push to reduce its carbon footprint. 

• GST on Hybrid Cars

Hybrid cars are now subject to the same GST framework as petrol and diesel vehicles. The GST slab applicable will be based on their engine size and overall length. Smaller hybrid cars with petrol engines up to 1200 cc or diesel engines up to 1500 cc and a length up to 4 m, fall under the 18% GST slab. 

On the other hand, larger or luxury hybrids with bigger engines or lengths beyond 4 m will fall under the 40% GST slab. While smaller hybrids benefit from reduced rates, bigger hybrids remain heavily taxed as they are considered premium vehicles. 

The GST rate cuts on automobiles will impact retail prices across various categories. With low rates for small cars and simplified slabs for larger vehicles, you can expect more affordability. 

This move is expected to lower prices of more car models, as some brands like Maruti Suzuki have already slashed prices. 

• How Car Prices Will Change

For small cars, a price drop of 10–13% on ex-showroom prices can be expected, driven by the shift from 28% GST + cess to 18%. 

Larger cars and SUVs, now taxed at a uniform 40% without cess, may also see minor reductions. While electric vehicles remain steady at 5% GST, the rate is believed to continue keeping EVs affordable for eco-friendly buyers.

Read also: Understand the Hidden Fees and Charges in Used Car Loans

• Examples of Popular Car Models Becoming Cheaper

Several major brands have already announced price reductions in line with new GST reforms. Maruti Suzuki has lowered prices on models like the Alto K10, enabling benefits up to ₹1.29 Lakhs. 

Luxury brands like Mercedes-Benz, BMW, Audi, and Jaguar Land Rover have also reduced prices across their portfolios. The reductions range from a few lakhs to over ₹10 Lakhs on premium SUVs and sedans. 

These cuts are expected to make both budget-friendly and high-end cars more attractive ahead of the festive season. 

The recent GST rate cuts are set to make vehicles more affordable while enabling wider benefits for customers. Here are some of them: 

• Lower Prices: You will now pay less tax, cutting down the overall purchase cost compared to earlier rates. 
• Boost in Affordability: Entry-level and mid-range cars become more affordable, encouraging household mobility. 
• Job Creation: Increased demand will lead to new hiring in dealerships, logistics, mechanics, and service networks. 
• Support to MSMEs: Rising vehicle sales create a multiplier effect for small manufacturers and component suppliers. 
• Retail Loan Growth: Since many purchases are credit-driven, GST cuts will encourage higher auto financing in smaller towns. 
• Customer Savings: You can benefit directly from lower upfront costs, making vehicle ownership more accessible. 

The new GST 2.0 impacts car loans indirectly by lowering the ex-showroom prices of cars. This, in turn, also reduces loan amounts and EMIs. Additionally, GST continues to apply to loan-related charges such as processing and foreclosure fees.  

• Lower Loan Amount and EMI

With GST 2.0 reducing car prices, the loan amount required to purchase a vehicle is expected to reduce. Since EMIs are calculated on the loan amount, you will now face smaller monthly instalments. This will automatically make car ownership more affordable. 

• Improved Loan Eligibility

Lower car prices also mean reduced financial obligations, which helps you qualify for loans more easily. Banks and NBFCs may find applicants more creditworthy with smaller loan requirements. This can thereby improve your access to financing options.

The GST rate cut on cars is designed to benefit not only buyers but also multiple other entities in the automobile ecosystem. These include: 

• Consumers: Lower GST reduces car prices, making vehicles more affordable for households and first-time buyers. 
• Dealers and Importers: With simplified tax rules, dealers can now pass on savings to customers and manage sales efficiently. 
• Manufacturers: Car makers benefit from reduced excise and cess, lowering production costs. 
• Small Car Buyers: Affordable car segments gain the most, especially in smaller towns and cities, where reduced prices stimulate demand. 
• Service Sector: Drivers, mechanics, service networks, and auto-finance companies see new opportunities due to demand for support services. 

With the GST cuts now in effect, this is one of the best times to consider buying a car. Small and mid-size cars benefit the most, as the tax rate has dropped to 18%, leading to savings of nearly 10–12%. 

For instance, a car priced at ₹8 Lakhs can cost around ₹7.2 Lakhs, and other discounts may lower the deal further.

If you are planning to buy SUVs, hybrids, or EVs, the benefits vary, but the relief is still applicable due to the removal of cess. SUVs and luxury cars see minor reductions, hybrids offer decent savings, while EVs remain at just 5% GST.