The government has notified the third phase of its Corporate Average Fuel Economy norms, setting progressively tighter fuel-efficiency requirements for passenger vehicle manufacturers from April 2027 while giving them several routes to comply, including higher weightage for electric and hybrid vehicles, benefits for alternative fuels, efficiency-technology credits and trading of compliance credits.
The final CAFE III framework will apply to M1 category vehicles manufactured or imported for sale in India from April 1, 2027 to March 31, 2032, according to a Ministry of Power notification.
The standards will continue to be calculated at the manufacturer level using the sales-weighted average fuel consumption of its vehicle portfolio.
The notification follows a revised draft circulated by the Ministry of Power in July for stakeholder consultation, with comments sought until August 6. The government had proposed applying the new framework to passenger vehicles between FY28 and FY32.
Under the final rules, battery electric vehicles and range-extended electric vehicles will receive the highest super-credit multiplier of 3.0, while plug-in hybrids and flex-fuel strong hybrids get 2.5. Strong hybrids receive a multiplier of 1.6 and flex-fuel ethanol vehicles 1.1.
The final notification also does not restore the dedicated small-car concession proposed in an earlier iteration of CAFE III. A September 2025 proposal had contemplated an additional 3g CO2/km benefit for certain sub-4-metre petrol cars, but that provision was dropped in subsequent drafts.
The treatment of small cars had emerged as one of the more contested elements of the CAFE III consultations. Maruti Suzuki and Toyota had supported concessions for smaller cars, while Tata Motors, Mahindra & Mahindra, Hyundai and Kia opposed special treatment.
Targets Tighten Every Year
CAFE III retains a weight-linked approach in which the annual fuel-consumption target differs according to the sales-weighted average unladen mass of an automaker's fleet.
The standard will be calculated using the formula a×(W−1,229)+c, where W represents the weighted average unladen mass of all eligible vehicles manufactured or imported for sale by an OEM.
For a manufacturer with a reference fleet weight of 1,229kg, the permitted average falls from 3.996 litres of petrol equivalent per 100km in FY28 to 3.860 litres in FY29, 3.7585 litres in FY30, 3.5313 litres in FY31 and 3.3273 litres in FY32.
Using the government's conversion methodology, that is equivalent to roughly 94.8g CO2/km in FY28, tightening to about 78.9g/km by FY32 for the reference-weight fleet.
The July draft contained the same progression. Compared with the September 2025 proposal, the revised framework eased the overall target curve by lowering the slope, raising the reference vehicle weight and increasing the baseline fuel-consumption constants, although the impact varies depending on the weight profile of a manufacturer's fleet.
Unlike an emission limit applied separately to each model, CAFE compliance is based on the performance of the manufacturer's entire eligible fleet. That makes product mix increasingly important. Sales of more efficient vehicles can offset higher-consuming models within the same portfolio.
EVs Get the Biggest Compliance Boost
The super-credit framework gives alternative powertrains additional weight when calculating an automaker's fleet performance.
A battery electric or range-extended electric vehicle will carry a volume multiplier of 3.0. Plug-in hybrids and strong hybrids capable of running on flex-fuel ethanol receive 2.5, conventional strong hybrids 1.6 and flex-fuel ethanol vehicles 1.1.
The system means an EV contributes disproportionately to the compliance calculation relative to an equivalent conventional vehicle, strengthening the regulatory incentive for manufacturers to increase electric vehicle sales.
The government has earlier described CAFE norms as one of the mechanisms intended to encourage manufacturers to shift their fleets towards more fuel-efficient and lower-emission technologies, including EVs. However, CAFE III does not prescribe a single technology pathway.
Strong hybrids continue to receive a compliance benefit, although their 1.6 multiplier is lower than the 2.0 level considered in an earlier version of the framework. The flex-fuel multiplier was similarly reduced from 1.5 to 1.1 during the evolution of the draft.
That distinction could influence how different manufacturers plan their portfolios. Tata Motors, Mahindra and JSW MG have been increasing their EV presence, while Toyota and Maruti Suzuki have placed greater emphasis on strong hybrids alongside other technologies. Hyundai and Kia are also expanding their electric portfolios while retaining large ICE businesses.
Actual compliance, however, will depend on each manufacturer's sales mix, vehicle weights, fuel consumption and volumes rather than simply on whether a particular powertrain is present in its portfolio.
CNG, Ethanol Also Get Compliance Benefits
The final rules also give carmakers another route through what the government calls a Carbon Neutrality Factor. Vehicles running on E20 or higher notified ethanol-petrol blends, including strong hybrids and plug-in hybrids, receive an 8% carbon-neutrality factor on tailpipe CO2.
Flex-fuel ethanol vehicles receive 22.3%, while CNG vehicles get 5% or the notified CBG blending percentage, whichever is higher. Diesel vehicles will receive a benefit linked to the actual biofuel blending level notified by the petroleum ministry.
The provision broadens the compliance pathways beyond electrification and could be particularly relevant for manufacturers with significant CNG exposure or plans for flex-fuel vehicles.
It also reflects the government's broader multi-fuel approach towards reducing oil consumption and transport emissions rather than relying exclusively on battery electric vehicles.
Carmakers Can Trade Compliance Credits
One of the bigger structural changes under CAFE III is the formalisation of a credit-and-debit system that allows compliance performance to carry financial value.
Manufacturers whose actual fleet fuel consumption is better than their prescribed target will generate credits. Companies that exceed their permitted fuel-consumption level will accumulate debits. These will be maintained in a manufacturer-specific compliance "passbook".
The regulation allows manufacturers to exchange or trade credits with other automakers on mutually agreed terms, giving companies that outperform their targets the possibility of transferring surplus credits to those falling short.
This effectively adds a market-based mechanism to what has traditionally been an engineering and product-planning regulation.
Manufacturers will also be allowed to offset outstanding debit balances by buying credits from the Bureau of Energy Efficiency. The prescribed buyout price rises through the CAFE III period, starting at ₹2,500 per g CO2/km in FY28, increasing to ₹3,000 in FY29, ₹3,500 in FY30, ₹4,000 in FY31 and ₹4,500 in FY32.
The escalating price implies that relying on purchased credits becomes progressively more expensive, increasing the incentive for companies to improve their underlying fleet performance.
The credit mechanism had already appeared in the revised July draft, which allowed manufacturers to carry forward credits, trade them with other OEMs or purchase credits from BEE.
Up to 9g/km Benefit From Efficiency Technologies
CAFE III could also have implications beyond vehicle powertrains. Manufacturers can claim a reduction of 1g CO2/km for each eligible efficiency technology used in a vehicle, subject to an overall cap of 9g/km.
The government has identified 12 technologies, including start-stop systems, tyre-pressure monitoring systems, regenerative braking, six-speed or higher transmissions, efficient 12V or 48V alternators, 12V/48V motor-generators, LED exterior lighting, advanced glazing, electric water pumps, high-efficiency air-conditioning systems, solar-reflective paint and PWM-controlled radiator fans.
That creates another route for ICE-heavy manufacturers to reduce their calculated fleet consumption and could also drive additional demand for suppliers of mild-hybrid systems, electronics, thermal management, glazing, lighting and transmission technologies.
For the first compliance block, manufacturers can claim savings from these technologies based on self-declaration. In the second block, the claims will have to be supported by validated tests using methodologies and procedures specified by the Ministry of Road Transport and Highways.
Two Compliance Blocks Give Carmakers Flexibility
The five-year CAFE III period will be split into two compliance blocks. The first covers three years from FY28 to FY30, while the second covers FY31 and FY32.
Credits and debits will be assessed annually and can be carried forward within the relevant compliance block. Any unused credits remaining at the end of a block will lapse.
This gives carmakers some flexibility in sequencing new models and technologies. A manufacturer could, for instance, accumulate credits during stronger compliance years and use them against deficits later in the same block.
Small-volume manufacturers with annual eligible vehicle volumes below 1,000 units are exempt from meeting the specific CAFE target, although they will still have to report their average fuel-consumption performance.
WLTP Reporting Starts From April 2027
CAFE III also begins India's transition towards using the Worldwide Harmonised Light Vehicles Test Procedure for corporate efficiency calculations. Manufacturers will have to declare the CO2 performance of models sold from April 1, 2027 under both the existing Modified Indian Driving Cycle and WLTP.
However, the conversion factor needed to translate the corporate CAFE target from MIDC to WLTP will be notified separately by the Ministry of Power in consultation with BEE, based on data reported by the designated testing agencies.
That leaves an important part of the implementation framework still to be finalised even though the five-year compliance regime itself has now been notified.