India will cut tariffs on cars to 40% in trade deal with EU, sources say

India plans to cut tariffs on cars imported from the European Union to 40% from as high as 110%, sources said. This is the biggest opening yet of the country’s vast market, as the two sides finalize a free trade pact that could come into effect as early as Tuesday (January 27, 2026).

Prime Minister Narendra Modi’s government has agreed to immediately cut taxes on a limited number of cars from the 27-nation bloc with an import price of more than 15,000 euros ($17,739), two sources briefed on the talks said. Reuters.

This will be further reduced to 10% over time, she added, easing entry into the Indian market for European automakers such as Volkswagen, Mercedes-Benz and BMW.

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The sources declined to be identified because the conversations are confidential and subject to last-minute changes. India’s Commerce Ministry and the European Commission declined to comment.

Pact has already been called ‘mother of all deals’

India and the EU are expected to announce the conclusion of the lengthy negotiations on the free trade pact, after which the two sides will finalize details and ratify what is being called ‘the mother of all agreements’.

The pact could expand bilateral trade and boost Indian exports of goods such as textiles and jewelry, which have been hit with 50% U.S. tariffs since late August. India is the world’s third largest auto market by sales after the US and China, but its domestic auto industry is one of the most protected. New Delhi currently imposes tariffs of 70% and 110% on imported cars, a level often criticized by executives including Tesla chief Elon Musk.

New Delhi has proposed immediately cutting import duties to 40 percent on about 200,000 internal combustion engine cars per year, one of the sources said. This makes this the most aggressive step yet to open up the sector. This quota may be subject to last-minute changes, the source added.

Battery electric vehicles will be excluded from import duty cuts for the first five years to protect investments by domestic players such as Mahindra & Mahindra and Tata Motors in the emerging sector, the two sources said. After five years, electric vehicles will receive similar tax cuts.

Market is currently dominated by Suzuki and local markers

Lower import taxes will be a boost for European automakers such as Volkswagen, Renault and Stellantis, as well as luxury players Mercedes-Benz and BMW, which produce cars locally in India but struggle to grow beyond a certain point partly because of high tariffs.

Lower taxes will allow automakers to sell imported vehicles at a lower price and test the market with a broader portfolio before committing to producing more cars locally, one of the two sources said.

European carmakers currently have less than a 4% share of the 4.4 million units per year Indian car market, which is dominated by Japan’s Suzuki Motor and its own brands Mahindra and Tata, which together control two-thirds.

With the Indian market expected to grow to 6 million units per year by 2030, some companies are already making new investments.

Renault is making a comeback in India with a new strategy. It is aiming for growth outside Europe, where Chinese carmakers are making strong inroads, and the Volkswagen Group is completing its next investment step in India through the Skoda brand.