The Centre has officially notified the Corporate Average Fuel Economy Phase 3 (CAFE-3) norms for automakers, setting new fleet-wide carbon dioxide emission targets that will take effect from April 2027 and remain in force through March 2032. The Ministry of Power issued the final rules on 30 September 2026, incorporating significant changes from a draft circulated in September 2025.

Key Changes From the Draft Rules

A notable departure from the earlier proposal is the removal of a 3 grams per km concession that had been suggested for petrol cars weighing up to 909 kg. That concession had faced opposition from several leading automakers and does not feature in the final notification.

Instead, the government has revised the underlying formula for calculating a manufacturer's fleet-wide CO2 emissions target. The reference vehicle weight has been raised to 1,229 kg from 1,170 kg in the September 2025 draft, and a lower annual weight adjustment factor has also been applied.

This recalibration effectively provides more relief to manufacturers whose fleets skew lighter, while tightening targets for makers of heavier vehicles. Under the revised formula, a 909-kg car now faces an FY28 emissions target of approximately 82.8 grams of CO2 per km, compared with about 76 grams under the earlier draft. Conversely, for a 2,500-kg vehicle, the target eases to approximately 142.4 grams per km against about 151.4 grams under the previous formula.

EV and Clean Vehicle Incentives Retained

The final CAFE-3 rules preserve the super-credit mechanism that rewards manufacturers for selling cleaner vehicles. Under this system, one battery electric vehicle (BEV) counts as three vehicles when calculating a manufacturer's fleet performance. The same 3x multiplier applies to range-extended electric vehicles (REEVs).

Plug-in hybrid electric vehicles (PHEVs) and strong hybrids running on flex-fuel receive a 2.5x factor, while conventional strong hybrids earn a 1.6x factor. Flex-fuel vehicles attract a 1.1x factor. These multipliers are designed to make it commercially advantageous for automakers to invest in cleaner powertrains rather than absorbing compliance penalties.

Credit-Debit System Introduced

A new credit-debit mechanism has also been introduced under CAFE-3. Manufacturers that outperform their individual emissions targets will accumulate credits, which can offset future shortfalls. Those that fall short will accrue debits, raising compliance costs. This banking system aligns India's framework more closely with international fuel economy regimes in the European Union and the United States.

What It Means for the Auto Sector

This comes amid a broader push by India to align its vehicle emissions standards with its net-zero commitments while managing the pace of the EV transition. The CAFE framework directly influences how automakers design and sell their product mix — a tighter regime accelerates electrification investment, while super-credits make that investment more financially viable. Notably, the removal of the small-car concession — despite industry lobbying — signals that the government is prioritising overall fleet emissions over segment-specific relief. The auto sector will now need to model compliance strategies ahead of the April 2027 implementation date.