India’s CAFE-III rules will change the commercial and regulatory calculations behind passenger vehicles sold in the country from April 1, 2027. The framework, notified under the Central Motor Vehicle Rules, 1989, will set annual fuel-consumption obligations for manufacturers while giving additional compliance value to battery-electric vehicles, hybrids, flex-fuel models and selected fuel-saving technologies.
The rules will apply to new M1-category passenger vehicles manufactured or imported for sale in India and remain in force until March 31, 2032. Their importance lies not only in the tighter annual targets but also in the way compliance is being redesigned. Manufacturers will be able to earn, pool, trade and purchase credits, while cleaner vehicle technologies will receive volume-based benefits through what the framework calls derogation factors or super credits.
That structure makes CAFE-III more than a single fuel-economy standard. It creates a compliance system that links vehicle sales, testing methods, carbon accounting, technology deployment and an emerging market for regulatory credits. The result could influence which powertrains manufacturers prioritise and how quickly efficiency technologies move from premium models into the wider passenger-vehicle market.
The annual standard will be calculated using the manufacturer’s weighted average unladen mass and a fixed constant of 1,229 kg. The calculation will use petrol-equivalent litres per 100 kilometres and the Modified Indian Driving Cycle, or MIDC. The target parameters will become progressively stricter during the five-year period. The notified multiplier and constant produce annual values moving from 3.9960 in FY 2027-28 to 3.3273 in FY 2031-32, while the multiplier declines from 0.001583 to 0.00131.
From April 1, 2027, a manufacturer’s annual average actual fuel consumption will have to be less than or equal to the applicable standard. This shifts the focus from the performance of individual models to the combined characteristics of a manufacturer’s annual vehicle sales. A company with a heavier or less efficient fleet will therefore have to balance that portfolio with more efficient vehicles, technology credits or credits acquired through the permitted mechanisms.
The framework divides compliance into two blocks. The first covers three years from FY 2027-28, while the second begins in FY 2030-31. Each manufacturer will maintain a passbook recording credits and debits. Performance better than the target will create a credit, while consumption above the target will create a debit.
Credits can be pooled and exchanged or traded between manufacturers on mutually agreed terms. A manufacturer with a debit balance can also purchase credits from the Bureau of Energy Efficiency. The notified buyout price rises from Rs 2,500 per gram of CO₂ per kilometre in FY 2027-28 to Rs 4,500 in FY 2031-32. Trading or buyout will be permitted only during a 30-day window from October 1 to October 31 of each assessment year.
This arrangement creates a financial consequence for missing the target while giving manufacturers more than one route to compliance. It also means that the effectiveness of the rules will depend on how the credit market operates, how transparent the trades are and whether the value of credits is strong enough to influence product planning. The supplied notification details the prices and trading window, but does not establish how many credits manufacturers are expected to generate or trade.
The largest technology-specific benefit is reserved for cleaner vehicle categories. Battery-electric and range-extended electric vehicles receive a volume derogation factor of 3.0. Plug-in hybrids and strong hybrids using flex-fuel ethanol receive a factor of 2.5. Strong hybrids receive 1.6, while flex-fuel ethanol vehicles receive 1.1.
These factors do not change the physical energy consumed by a vehicle. They change how a vehicle contributes to the manufacturer’s fleet-level compliance calculation. In practice, the system recognises that a manufacturer selling a limited number of low-emission vehicles may still need additional regulatory value from those models to offset less efficient vehicles in its portfolio.
The rules also introduce a Carbon Neutrality Factor for petrol, CNG and flex-fuel ethanol vehicles. For ethanol-blended petrol vehicles, including E20 or other specified blends, as well as strong and plug-in hybrids, the discount on manufacturer-declared tailpipe CO₂ will be 8 per cent. Flex-fuel ethanol vehicles receive a 22.3 per cent discount. For CNG vehicles, the factor is 5 per cent or the CBG blending percentage notified by the Ministry of Petroleum and Natural Gas, whichever is higher. For diesel vehicles, the factor will be linked to the actual biofuel blending percentage specified by the ministry.
The carbon-neutrality mechanism makes fuel policy part of vehicle-efficiency compliance. It also places importance on how blending levels are specified and measured by the relevant ministries. The framework therefore connects the automobile industry with fuel supply policy rather than treating vehicle emissions as an issue determined solely by manufacturers.
Manufacturers can claim a further derogation for specified technologies installed in vehicles. Each eligible technology can provide a credit of 1.0 gram of CO₂ per kilometre, equivalent to 0.0422 litre per 100 kilometres. The total claim is capped at 9.0 grams of CO₂ per kilometre, or 0.3795 litre per 100 kilometres.
The eligible technologies include start-stop systems, tyre-pressure monitoring, regenerative braking, six-speed or higher transmissions, efficient 12V or 48V alternators, 12V or 48V motor-generators, exterior LED lighting, advanced glazing, electric water pumps, high-efficiency air-conditioning, solar-reflective paint and PWM-controlled radiator fans.
During the first compliance block, manufacturers can rely on self-declaration for energy savings claimed through these technologies. In the second block, claims will require validated test results using methods and procedures specified by the Ministry of Road Transport and Highways. Self-declarations for high-efficiency air-conditioning and solar-reflective paint will be benchmarked after the first compliance block.
This creates a two-stage enforcement model. The initial period offers manufacturers flexibility while the testing and certification system is developed. The later period places greater weight on validated performance. The ministry of road transport is expected to develop certification methods, while the provisions will be enforced in consultation with the concerned ministries and departments.
CAFE-III will also standardise how different fuels are compared. The framework provides factors for calculating consumption from measured tailpipe CO₂: 0.04217 for petrol, 0.03776 for diesel, 0.06150 for LPG and 0.03647 for CNG. Diesel, LPG, CNG and electricity will then be converted into petrol equivalents using separate factors of 1.1168, 0.6857, 1.1563 and 0.10288 respectively. Electric vehicles will also be measured in kilowatt-hours per 100 kilometres.
Every model sold from April 1, 2027, will have to declare performance under both MIDC and the Worldwide Harmonised Light Vehicles Test Procedure, or WLTP, as notified by the Ministry of Road Transport and Highways. The conversion factor for translating CAFE targets from MIDC to WLTP will be notified separately by the Ministry of Power in consultation with the Bureau of Energy Efficiency, using data reported to the bureau.
The dual-test requirement addresses a measurement issue that is central to consumer and regulatory understanding: a vehicle’s stated efficiency depends partly on the test cycle used. Requiring both declarations makes the performance information more comparable across the two systems, although the final impact will depend on the conversion factor eventually notified.
The compliance process will require annual state-wise sales data along with the final report. The designated agency will compile the information and submit it to the Bureau of Energy Efficiency by September 30 of each assessment year. The final passbook is to be submitted within one month of the trading window closing, before November 30.
Although compliance will be assessed annually, contraventions will be dealt with at the end of the relevant compliance block after credits and debits have been settled. Non-compliance in litres per 100 kilometres will be calculated by dividing the total debit in grams of CO₂ per kilometre by total sales during the block and multiplying the result by 23.7135.
Manufacturers producing or importing fewer than 1,000 eligible vehicles in a reporting period will be treated as small-volume manufacturers. They will be exempt from the specific emission target but must still report their annual average actual fuel consumption to the Bureau of Energy Efficiency. This distinction limits the direct compliance burden on very small manufacturers while retaining a reporting obligation.
The urban significance of CAFE-III is visible in the way the framework combines fleet efficiency with vehicle-market design. Passenger vehicles are a major part of everyday mobility, but the rules do not prescribe a single technology. Instead, they establish a common accounting framework in which electric vehicles, hybrids, alternative fuels and incremental efficiency technologies receive different forms of recognition.
The evidence supplied with the notification confirms the targets, credit mechanisms, technology factors, fuel-conversion rules and reporting timetable. It does not establish how manufacturers will alter prices, model availability or consumer incentives. Those outcomes will depend on product decisions, credit values, fuel policy and the implementation methods still to be specified.
The next important milestones are the development of certification methods, notification of the MIDC-to-WLTP conversion factor and the start of the first compliance block on April 1, 2027. The operation of the first October trading window and the quality of validated technology claims will show how the framework works beyond its design on paper.
