The Government of India has notified the third phase of Corporate Average Fuel Economy, or CAFE III, standards for passenger vehicles, introducing a new five year framework aimed at improving fuel efficiency and reducing carbon dioxide emissions from the automobile sector.
The new CAFE III norms will come into effect from April 1, 2027, and will remain applicable until March 31, 2032. The regulations will cover new passenger vehicles manufactured or imported for sale in India. The framework replaces the existing CAFE standards and establishes progressively tighter fuel consumption targets for vehicle manufacturers over the five year period.
One of the most significant changes in the new framework is the treatment of electric vehicles. Battery electric vehicles, or BEVs, will receive a 3X super credit when manufacturers calculate their fleet average performance. Range extended electric vehicles will also receive the same 3X factor. In practical terms, one eligible electric vehicle can count as three vehicles for the relevant CAFE compliance calculation. This gives manufacturers a stronger compliance benefit from selling electric vehicles as part of their overall portfolio.
The new rules also provide different credit multipliers for other cleaner powertrain technologies. Plug in hybrid electric vehicles and strong hybrid electric vehicles using flex fuel ethanol receive a 2.5X multiplier. Strong hybrid electric vehicles receive a 1.6X multiplier, while flex fuel ethanol vehicles receive a 1.1X multiplier. These provisions give manufacturers several technology options for improving their fleet level compliance.
Another important change is the removal of a separate concession specifically designed for small cars. Earlier proposals had considered providing an additional benefit for certain lightweight petrol cars. A September 2025 proposal, for example, included a 3 grams per kilometre carbon dioxide concession for qualifying petrol cars weighing up to 909 kg.
The final CAFE III notification does not retain that separate small car concession. Instead, the government has adopted a revised weight based formula that provides a relatively softer target for lighter vehicle fleets and tighter requirements for heavier vehicles. This means lighter cars can still benefit from the overall structure, but they do not receive a separate small car category or dedicated concession.
The CAFE III framework is based on the weighted average unladen mass of the vehicles sold or imported by a manufacturer. The reference weight in the final formula is 1,229 kg. The annual fuel consumption targets become progressively stricter during the five year period.
For a fleet with a weighted average unladen mass of 1,229 kg, the permitted average fuel consumption standard is 3.996 litres per 100 km in 2027-28. The benchmark falls to 3.860 litres per 100 km in 2028-29, 3.7585 litres per 100 km in 2029-30, 3.5313 litres per 100 km in 2030-31 and 3.3273 litres per 100 km in 2031-32. This represents a gradual tightening of fuel efficiency requirements for manufacturers.
The government has also introduced a credit and debit mechanism under CAFE III. Manufacturers that perform better than their applicable target can earn compliance credits, while manufacturers performing below the required standard can accumulate debits. These credits can be carried forward within the specified compliance blocks.
The first compliance block covers three financial years from 2027-28 to 2029-30, while the second block covers two years from 2030-31 to 2031-32. Manufacturers will also be allowed to trade compliance credits with other manufacturers under the prescribed framework. A manufacturer with a deficit can additionally purchase credits from the Bureau of Energy Efficiency, subject to the applicable rules and prices.
The regulations also recognise fuel saving technologies that can help manufacturers improve their compliance position. The notification includes technologies such as start stop systems, tyre pressure monitoring, regenerative braking, efficient alternators, motor generators, LED exterior lighting, advanced glazing, electric water pumps, high efficiency air conditioning systems, solar reflective paint and PWM controlled radiator fans.
Manufacturers can claim benefits for eligible technologies subject to the prescribed conditions and limits. The overall technology related benefit is capped at 9 grams of carbon dioxide per kilometre. Certification and validation procedures will be implemented under the framework specified by the authorities.
CAFE III also includes provisions relating to alternative fuels and carbon neutrality factors. The rules provide specified treatment for ethanol blended petrol, flex fuel ethanol vehicles and CNG vehicles. These provisions are intended to provide manufacturers with additional pathways to meet the progressively tighter fleet efficiency requirements.
Another change is the requirement for manufacturers to provide vehicle performance information under both the Modified Indian Driving Cycle and the Worldwide Harmonized Light Vehicles Test Procedure. The conversion factor for translating the fuel economy targets from MIDC to WLTP will be notified separately by the Ministry of Power in consultation with the Bureau of Energy Efficiency.
The new norms therefore represent a broader regulatory framework rather than a rule focused only on electric vehicles. Automakers will have to balance their overall product mix, vehicle weight, powertrain technology, fuel efficiency improvements and available compliance credits.
For consumers, CAFE III does not directly impose a new purchase tax or registration charge on individual car buyers. Its primary impact is on manufacturers and the vehicles they produce or import. Over time, the tighter fleet targets and stronger compliance value assigned to EVs and other cleaner technologies could influence the technology mix offered by automakers in India.
The final notification provides the industry with a clear regulatory framework beginning in April 2027. While electric vehicles receive the highest 3X super credit, small cars do not receive a separate concession under the final rules. Instead, lighter vehicles receive relatively softer treatment through the revised weight based calculation, while heavier vehicles face progressively stronger efficiency requirements.
