Car prices changed across India on 22 September 2025. Some cars became cheaper by up to 1.86 lakh rupees. Others got taxed at a flat 40% with no extra charges hidden in the fine print.
This happened because the 56th GST Council Meeting removed the old system of 28% GST plus a compensation cess that could add another 1% to 22% on top. In its place, cars now fall under two simple rates: 18% for small cars and 40% for everything bigger.
As an SEO writer covering GST content for gstregistration.co, I checked this information directly against the GST Council's own FAQ document and the official PIB press release, not just secondhand blog posts. Below is exactly what changed, who it affects, and how to work out the GST on any car you are looking to buy.
This guide covers the exact rate for every car category, real price examples, how the old tax system compared, and a full set of questions people are actually asking about this change. If you also need to register your business for GST registration, our team can guide you through the process.
What Is the GST Rate on Cars in 2026?
Cars in India attract either 18% or 40% GST as of 2026. Small cars under specific engine and length limits are taxed at 18%. Mid-size cars, SUVs, and luxury vehicles are taxed at 40%. Electric vehicles remain at 5%. These rates took effect from 22 September 2025 and include no additional compensation cess.
Before this change, almost every car in India was taxed at 28% GST, with a compensation cess added on top that ranged from 1% for small cars to 22% for large SUVs and luxury vehicles. This meant the real tax on a big SUV could reach close to 50%.
The new system removes this two-part structure entirely. There is no cess anymore. What you see is what you pay, either 18% or 40%, depending on which category your car falls into.
Small Car GST Rate: Why It Dropped From 28% to 18%
A small car under GST rules is a petrol, LPG, or CNG car with engine capacity up to 1200cc and length up to 4000mm, or a diesel car with engine capacity up to 1500cc and length up to 4000mm. These cars now attract 18% GST, down from 28%.
This definition comes directly from the GST Council's official FAQ released after the 56th meeting. It is not an estimate or an industry guess. Cars like the Maruti Alto, Swift, WagonR, Baleno, Hyundai i20, Tata Punch, and sub-4 metre SUVs such as the Kia Sonet and Maruti Brezza fall into this bracket.
The 10 percentage point cut is significant. A hatchback priced at 6 lakh rupees earlier carried close to 29% total tax. At 18% flat, buyers now save somewhere between 60,000 and 80,000 rupees on a similarly priced car, depending on the exact model and variant.
SUV and Luxury Car GST Rate: Why It Is Now 40%, Not 28% Plus Cess
Cars that do not meet the small car definition, including SUVs over 4000mm, engines above 1200cc petrol or 1500cc diesel, and all luxury vehicles, are taxed at a flat 40% GST with no compensation cess. Under the old system, these vehicles often faced a combined tax burden of 43% to 50%.
This is where the change gets interesting. The headline GST rate on big vehicles technically went up, from 28% to 40%. But the compensation cess, which used to add 15% to 22% on top of that 28%, has been completely scrapped.
The net effect is that total tax on most large SUVs and luxury cars actually went down, even though the GST rate itself looks higher on paper. A luxury sedan that used to attract 48% combined tax (28% GST plus 20% cess) now attracts a flat 40%, an 8 percentage point drop in real terms.
GST on Cars Above 10 Lakh vs Above 20 Lakh: Real Price Examples
GST on cars above 10 lakh rupees depends entirely on which category the car falls into, not the price alone. A 10 lakh rupee small hatchback pays 18% GST, while a 10 lakh rupee mid-size SUV pays 40%. There is no separate GST slab based purely on price.
This is a common point of confusion. The GST rate depends on engine size, fuel type, and vehicle length, not the sticker price. Two cars priced identically at 10 lakh rupees can be taxed completely differently based on their specifications.
For a real example, the Kia Sonet's top diesel automatic variant saw a price cut of up to 1.64 lakh rupees after the reform, since it falls under the small car definition. On the other end, a luxury SUV priced at 50 lakh rupees now attracts 20 lakh rupees in GST at the flat 40% rate, bringing the final price to 70 lakh rupees.
For cars above 20 lakh rupees, almost all of them fall outside the small car definition due to engine size or length, so the 40% rate applies in most cases. The one common exception is electric vehicles, which stay at 5% regardless of price.
GST on Two-Wheelers: The 350cc Rule Explained
Motorcycles up to 350cc attract 18% GST, while motorcycles above 350cc attract 40% GST. This mirrors the same logic used for cars, where smaller and more affordable vehicles get the lower rate.
Commuter bikes and everyday two-wheelers almost entirely fall under the 18% bracket, which dropped from 28% under the old system. This directly reduces the on-road price of the bikes most Indian households actually buy.
Only premium and performance motorcycles above 350cc, a small segment of the market, face the higher 40% rate, and even they benefit from the removal of the earlier cess.
GST on Electric Vehicles: Still 5%
Electric vehicles continue to attract a concessional 5% GST rate, unchanged by the 2025 reform. This applies regardless of the vehicle's price, size, or category, making EVs the lowest taxed vehicle segment in India.
This lower rate was already in place before GST 2.0 and the Council chose to leave it untouched, since encouraging EV adoption remains a policy priority.
The gap between EV taxation and regular vehicle taxation has actually widened in percentage terms for large vehicles, since a 40% rate on a luxury SUV compares to just 5% on an equivalent electric model.
Old vs New: How Car Tax Actually Changed
Under the old system, cars paid 28% GST plus a compensation cess ranging from 1% to 22% depending on the category. Under the new system, cars pay either 18% or 40% GST with no cess at all. Total tax dropped for most categories except mid-size cars, where it stayed roughly similar.
Small petrol cars under 1200cc: old total tax was around 29% (28% GST plus 1% cess). New rate is 18%, a clear drop.
Small diesel cars under 1500cc: old total tax was around 31% (28% GST plus 3% cess). New rate is 18%, a clear drop.
Mid-size cars: old total tax was around 43% (28% GST plus 15% cess). New rate is 40%, a smaller drop.
Large SUVs and luxury cars: old total tax reached up to 50% (28% GST plus 22% cess). New rate is a flat 40%, a meaningful drop for this segment specifically.
How to Calculate GST on a Car: Step by Step
To calculate GST on a car, multiply the ex-showroom price by the applicable rate, either 18% or 40%. Add this GST amount to the ex-showroom price to get the on-road base price before road tax, insurance, and registration charges.
Take the ex-showroom price of the car first. This is the factory price plus dealer margin and transport, before any tax is added.
Multiply this price by 18% if it is a small car, or by 40% if it falls into the larger category. For example, a small car priced at 8 lakh rupees ex-showroom attracts GST of 1.44 lakh rupees, bringing the price to 9.44 lakh rupees before road tax and insurance.
For a luxury SUV priced at 50 lakh rupees, the GST works out to 20 lakh rupees, taking the price to 70 lakh rupees before other charges. Road tax and insurance are then calculated on top of this GST inclusive price, and both tend to be lower now since they are usually a percentage of a smaller base price than before.
Car HSN Code and Why It Matters
Passenger motor vehicles fall under HSN code 8703 for GST purposes. Goods transport vehicles fall under HSN code 8704. Both categories saw their GST rate reduced from 28% to 18% for the applicable vehicle types under the 2025 reform.
For most car buyers, the HSN code is not something you need to think about directly. It matters more for dealers, manufacturers, and businesses that need to bill correctly and file accurate GST returns.
If you run a dealership or a business that buys or sells vehicles, using the wrong HSN code or an outdated rate after 22 September 2025 can trigger a GST notice, since the department cross-checks filed returns against the correct classification.
Should You Buy a Car Now? What This Means for Buyers
For small car buyers, the GST cut makes 2026 one of the better times to buy, with savings of 60,000 to 180,000 rupees depending on the model. For SUV and luxury car buyers, the removal of cess means moderate savings, though the headline 40% rate can still look steep on the price tag.
If you are looking at a hatchback, sub-4 metre SUV, or a commuter bike, the tax cut is a genuine and immediate saving, and most dealers have already passed this on through revised price lists.
If you are looking at a mid-size or larger SUV, the actual saving is smaller than it appears, since the drop is mainly the removal of cess rather than a real rate cut. It is still worth comparing the old and new on-road price for your exact model before assuming a big discount.
Why This Matters: A Practical View for Buyers and Businesses
A lot of confusion around this topic comes from people comparing headline GST percentages without accounting for the cess that used to sit on top. A 40% rate sounds worse than 28%, until you realise the 28% rate often came with cess that pushed the real number to 43% or higher.
Working on GST compliance content regularly, the most common mistake seen is dealers and small businesses continuing to bill at old rates past the 22 September 2025 cutoff, which creates avoidable compliance issues. Buyers make a similar mistake by assuming price is the only factor that decides the GST rate, when engine size and length matter just as much.
The safest approach, whether you are buying a car or running a dealership, is to check the exact category your vehicle falls into rather than relying on the price tag alone.
Conclusion
GST on cars in 2026 comes down to two numbers. 18% for small cars that meet the engine and length limits, and 40% for everything else, with electric vehicles staying at a concessional 5%.
Three things matter most. First, the rate depends on engine size, fuel type, and length, not the price of the car. Second, the compensation cess is gone entirely, which is why even a 40% rate can mean lower total tax than before. Third, always check the exact specifications of the model you want, since two similarly priced cars can land in completely different tax brackets.
Whether you are buying your first car or running a dealership that needs to bill correctly, working from the actual GST Council notification rather than a rounded-off estimate is the safest way to avoid surprises.
Need Help With GST Registration or Compliance for Your Business?
If you run a car dealership, an automobile parts business, or any business needing to stay compliant with the updated GST rates, our team at gstregistration.co can help you register correctly and manage your GST return filing and GST verification needs. For broader legal support beyond GST, legaldev.in's compliance blog also covers related topics. Get in touch with our team today for a free consultation.
Frequently Asked Questions
Q1. What is the GST rate on cars in 2026?
Cars attract either 18% or 40% GST in 2026, depending on the vehicle category. Small cars with petrol or CNG engines up to 1200cc, or diesel engines up to 1500cc, and length up to 4000mm, are taxed at 18%. All other cars, including mid-size cars, SUVs, and luxury vehicles, are taxed at 40%. Electric vehicles remain at 5%.
Q2. Will cars come under 18% GST?
Yes, but only small cars that meet the specific engine and length criteria. Petrol, LPG, or CNG cars up to 1200cc, or diesel cars up to 1500cc, with length up to 4000mm, fall under the 18% rate. Cars exceeding these limits are taxed at 40%.
Q3. What is the maximum GST rate on a motor vehicle in 2026?
The maximum GST rate on a motor vehicle is 40%. This applies to mid-size cars, SUVs, luxury vehicles, and motorcycles above 350cc. Unlike the earlier system, there is no additional compensation cess on top of this rate.
Q4. Which cars fall under 40% GST?
Cars that do not meet the small car definition fall under 40% GST. This includes SUVs and cars with length over 4000mm, petrol engines over 1200cc, diesel engines over 1500cc, and all luxury vehicles regardless of size.
Q5. How do I calculate GST on a car?
Multiply the ex-showroom price of the car by 18% for a small car or 40% for a larger vehicle. Add this amount to the ex-showroom price to get the GST inclusive price, before road tax, insurance, and registration are added separately.
Q6. What is the GST on cars above 10 lakh rupees?
There is no separate GST rate based on price alone. A car above 10 lakh rupees can attract either 18% or 40% GST depending on its engine size, fuel type, and length. A small hatchback above 10 lakh rupees still pays 18%, while a mid-size SUV above 10 lakh rupees pays 40%.
Q7. What is the GST on cars above 20 lakh rupees?
Most cars priced above 20 lakh rupees fall outside the small car definition and are taxed at 40%, since they typically exceed the engine size or length limits. Electric vehicles remain an exception at 5%, regardless of price.
Q8. Is there still a compensation cess on cars?
No. The compensation cess on cars was completely removed as part of the 2025 GST reform, effective from 22 September 2025. Cars now pay a single GST rate, either 18% or 40%, with nothing added on top.
Q9. What GST rate applies to electric vehicles?
Electric vehicles continue to attract a concessional 5% GST rate, unchanged by the recent reform, regardless of the vehicle's price or size.
Q10. What HSN code applies to cars for GST purposes?
Passenger motor vehicles are classified under HSN code 8703. Goods transport vehicles fall under HSN code 8704. Both attract 18% GST for the categories that qualify for the lower rate.
Q11. When did the new car GST rates come into effect?
The new rates took effect from 22 September 2025, following the recommendations of the 56th GST Council Meeting held on 3 September 2025.
Q12. Do these new GST rates apply to used cars as well?
The purchase of a used car from an unregistered individual seller generally falls outside GST. However, the sale of used cars by registered dealers is taxed under separate margin scheme rules, and is not the same as the rates discussed for new car purchases in this guide.
Author Bio
Rohit, SEO Intern and Content Writer, LegalDev
Rohit writes GST compliance and registration content for gstregistration.co, helping business owners and consumers understand GST rate changes and compliance requirements in plain language.
