Fuel-efficiency rules 2027: How CAFE-III norms will affect EVs, hybrids, small cars & petrol vehicles

India's passenger vehicle industry is heading towards a new fuel-efficiency regime, with the government's Corporate Average Fuel Economy (CAFE-III) norms set to take effect from April 1, 2027. The rules will remain in force until March 31, 2032 and will cover M1 category passenger vehicles manufactured or imported for sale in India.

The new framework puts greater emphasis on fleet-wide fuel consumption and gives automakers several ways to meet their targets, including credit trading, additional benefits for electric and hybrid vehicles, carbon-neutrality factors for certain fuels and incentives for fuel-saving technologies.

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But what does CAFE-III actually mean for EVs, hybrids, petrol and CNG cars, and what happens to smaller manufacturers? Here's a breakdown.

CAFE-III norms: New fuel-efficiency targets from FY2027-28

Under the new system, a manufacturer's annual average actual fuel consumption will be measured in petrol-equivalent litres per 100 km using the Modified Indian Driving Cycle (MIDC).

The target will depend on the weighted average unladen mass of the manufacturer's new vehicles, along with a fixed benchmark of 1,229 kg.

The prescribed multiplier and constant will become progressively tighter over the five-year period:

Financial year	a	b
FY 2027-28	0.00158	3.9960
FY 2028-29	0.00152	3.8600
FY 2029-30	0.00148	3.7585
FY 2030-31	0.00139	3.5313
FY 2031-32	0.00131	3.3273

The basic requirement is straightforward: a manufacturer's annual average actual fuel consumption must be equal to or lower than the applicable target.

The targets therefore become progressively stricter as the CAFE-III cycle moves towards FY2031-32.

CAFE-III compliance will work in two blocks

The five-year period will be divided into two compliance blocks.

The first block will cover FY2027-28 to FY2029-30, while the second will cover FY2030-31 and FY2031-32.

Automakers will maintain a passbook recording their CAFE performance.

If a company performs better than its prescribed fuel-consumption target, it earns a credit. If its actual consumption is higher than the permitted level, it records a debit.

This gives manufacturers some flexibility in managing their fleet-wide compliance rather than requiring every individual model to meet the same efficiency level.

Automakers can trade CAFE credits

One of the key features of CAFE-III is the ability to pool, exchange or trade credits.

A manufacturer with excess credits can trade them with another manufacturer on mutually agreed terms. Companies with a debit balance can also buy credits from the Bureau of Energy Efficiency (BEE).

The notified buyout rate will increase every year:

Financial year	Rate
FY 2027-28	Rs 2,500 per g CO2/km
FY 2028-29	Rs 3,000 per g CO2/km
FY 2029-30	Rs 3,500 per g CO2/km
FY 2030-31	Rs 4,000 per g CO2/km
FY 2031-32	Rs 4,500 per g CO2/km

However, manufacturers will have only a 30-day trading window, from October 1 to October 31, for credit exchange or buyout in each assessment year.

EVs get the biggest 'super credit'

Electric vehicles will receive significant additional weight under the new CAFE system.

Battery electric vehicles (BEVs) and range-extended electric vehicles will receive a volume derogation factor of 3.0.

In simple terms, these vehicles receive additional compliance value when a manufacturer's fleet average is calculated.

Other cleaner powertrains will also receive benefits:

• Plug-in hybrids and strong hybrids using flex-fuel ethanol: 2.5
• Strong hybrid vehicles: 1.6
• Flex-fuel ethanol vehicles: 1.1

This gives automakers more flexibility to use EVs, hybrids and alternative-fuel vehicles to meet their fleet-wide efficiency requirements. The final framework retains the particularly strong treatment for BEVs.

What about small cars under CAFE-III?

The new rules should not be confused with a blanket exemption for small cars.

Instead, the framework provides an exemption for small-volume manufacturers whose manufactured or imported volume of eligible vehicles is below 1,000 units in a reporting period.

These manufacturers will not be subject to the specific emission target, although they will still have to report their annual average actual fuel consumption to the BEE.

The notified CAFE-III framework also does not retain a separate special compliance benefit for small passenger cars, a change from some earlier proposals.

CAFE-III gives alternative fuels a carbon-neutrality benefit

The new framework also introduces a Carbon Neutrality Factor (CNF) for certain fuels.

For vehicles running on ethanol-blended petrol, including specified E20 blends, as well as strong hybrid and plug-in hybrid vehicles, an 8% discount will apply to declared tailpipe CO2 emissions.

For flex-fuel ethanol vehicles, the discount is 22.3%.

For CNG vehicles, the factor will be 5% 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 petroleum ministry.

The aim is to account for the role of alternative fuels when calculating a manufacturer's overall CAFE performance.

Fuel-saving technologies can also earn compliance credits

CAFE-III allows manufacturers to claim additional benefits for certain technologies designed to improve vehicle efficiency.

Each eligible technology can provide a credit of 1 g CO2/km, equivalent to 0.0422 litre/100 km, with an overall limit of 9 g CO2/km or 0.3795 litre/100 km.

The list includes:

• Start-stop systems
• Tyre pressure monitoring systems
• Regenerative braking
• Six-speed or higher transmissions
• 12V/48V efficient alternators
• 12V/48V motor-generators or micro-hybrid systems
• Exterior LED lighting
• Advanced glass and glazing
• Electric water pumps
• High-efficiency air-conditioning systems
• Solar-reflective paint
• PWM-controlled radiator fans

The Ministry of Road Transport and Highways will develop the certification methodology for these technologies.

During the first compliance block, manufacturers can rely on self-declaration for claimed energy savings. From the second block, claims will need to be supported by validated test results using the prescribed methods.

How EV, diesel, CNG and LPG efficiency will be compared

CAFE-III creates a common system by converting different fuel types into petrol-equivalent consumption.

The framework specifies conversion factors for petrol, diesel, LPG and CNG based on measured tailpipe CO2.

The petrol-equivalent conversion factors are:

• Diesel: 1.1168
• LPG: 0.6857
• CNG: 1.1563
• Electricity: 0.1028

Electric vehicles will first be measured in kWh per 100 km, before their energy consumption is converted for CAFE calculations.

MIDC and WLTP figures will both matter

From April 1, 2027, manufacturers will have to declare performance under both the Modified Indian Driving Cycle (MIDC) and the Worldwide Harmonised Light Vehicles Test Procedure (WLTP) for models sold in India.

The CAFE targets themselves will continue to be calculated using the notified methodology, while the conversion factor between MIDC and WLTP will be separately notified by the Ministry of Power in consultation with the BEE.

The move gives consumers and regulators access to figures based on both testing systems, while allowing the CAFE framework to continue using its prescribed calculation method.

Automakers face tighter reporting requirements

Manufacturers will have to submit state-wise sales data every year along with their final compliance report.

The designated agency will compile the information and submit it to the BEE by September 30 of each assessment year.

After the October trading window closes, the agency will submit the final passbook within one month, or before November 30.

Although compliance will be assessed annually, any violation will be dealt with at the end of the relevant compliance block after credits and debits have been settled.

What CAFE-III means for car buyers

CAFE-III is primarily a regulation for automakers rather than a direct requirement on individual car owners.

However, it could influence the kind of cars manufacturers bring to the Indian market from 2027 onwards.

With EVs receiving the highest super-credit, hybrids and alternative-fuel vehicles also getting compliance benefits, and fleet-wide fuel-efficiency targets becoming progressively tighter, automakers will have more reason to improve the efficiency of their overall vehicle line-up.

For buyers, that could mean a greater focus on EVs, hybrids, fuel-efficient petrol and CNG models and technologies that reduce energy consumption as manufacturers adapt to the new rules.

The government had earlier circulated the CAFE-III draft for stakeholder consultation, covering M1 passenger vehicles for the 2027-28 to 2031-32 period. The final notified framework now sets the compliance architecture that will apply from April 2027.


Inputs from agencies