The Indian government has announced major updates to tax rates for two-wheelers, three-wheelers, small petrol and diesel cars during a key meeting of the GST Council. This change lowers the taxes on small petrol and diesel cars, making them more affordable for everyday buyers. The new rules will start on September 22, 2025, right before the festive season, helping families and first-time car owners save money on their purchases.
Why This Change Matters
Before this update, small cars faced a high tax rate of 28% plus extra charges called compensation cess, pushing the total tax up to 29% for petrol models and 31% for diesel ones. These cars are defined as those with petrol engines up to 1,200cc or diesel engines up to 1,500cc, and a length under 4 meters.
With sales of these affordable vehicles dropping in recent years—now making up only about a third of the 4.3 million passenger cars sold last year, down from nearly half before the pandemic—the government aims to boost demand and support the auto industry.
The move is part of a larger tax reform promised by Prime Minister Narendra Modi on Independence Day, simplifying the system by reducing the number of tax slabs from four to mainly two: 5% for essentials and 18% for most other goods, with a new 40% rate for luxury items.
What This Means for Small Cars
Under the new rules, the tax on these small cars drops to a flat 18%, removing the extra cess. This could lead to price reductions of 5% to 8% overall. For example, a popular small car like the Maruti Suzuki Wagon R, with an ex-showroom price around 6 lakh rupees, might see its on-road price fall by about 60,000 rupees.
Similarly, the Maruti Suzuki Baleno could become 75,000 rupees cheaper, while models like the Hyundai Creta or Mahindra XUV700 might save buyers up to 1.15 lakh rupees, even if they fall into slightly larger categories that now face a 40% rate instead of the previous 50% total.
Companies like Maruti Suzuki, which relies heavily on small cars for half its sales, stand to gain the most, with experts predicting a surge in showroom visits during Diwali.
Other brands such as Hyundai, Tata Motors, and Kia will also benefit, as lower prices could help shift buyer interest back from bigger SUVs.
How It Affects People
This tax cut comes at a great time for middle-class families, students, and small business owners who rely on compact cars for daily commutes, school runs, or work travel. With car prices dropping, monthly loan payments could decrease by 600 to 2,000 rupees, making ownership easier.
The auto sector, which has seen slow growth of just 2-3% in recent months, expects a big lift in sales during the holidays, potentially creating more jobs in manufacturing and dealerships.
However, diesel variants might not see as much relief compared to petrol ones, and buyers of larger or luxury cars will still pay higher rates under the new 40% slab for items like high-end SUVs.
Electric vehicles remain the cheapest option at just 5% tax, encouraging greener choices without changes.
What’s Next
The GST Council, led by Finance Minister Nirmala Sitharaman, approved these reforms after discussions that started in August.
While the changes are set to kick in soon, experts note that the government might face a revenue drop of around 4 to 5 billion dollars, but increased sales could help balance that out. Car dealers are already gearing up with promotions, and buyers are advised to wait a bit if possible to take advantage of the lower prices.
This update is part of broader reforms covering 175 products, from personal care items to electronics, all aimed at making life more affordable for everyday Indians.
