India-EU FTA 2026: Luxury Car Tariffs Cut From 110% to 10%

A New Era for India's Automotive Market

On January 27, 2026, India and the European Union finalized a historic Free Trade Agreement (FTA), a culmination of nearly two decades of negotiations. This landmark deal is set to significantly reshape bilateral trade, with the luxury automotive sector poised for a major transformation. The agreement's centerpiece is a drastic, phased reduction of import duties on cars imported from Europe, from a peak of 110% down to just 10%, heralding a new era of accessibility and choice for Indian consumers.

Understanding the Tariff Overhaul

The most significant change under the FTA is the restructuring of tariffs on Completely Built Units (CBUs), which are vehicles imported fully assembled. Currently, these cars face duties that can more than double their original price. The new agreement introduces a phased-down approach, creating a more favorable import environment for European brands like Mercedes-Benz, BMW, Audi, and Porsche.

However, the benefits are not immediate or unlimited. The tariff reduction is governed by a Tariff Rate Quota (TRQ) system, which caps the number of vehicles eligible for the lower duty at 250,000 units annually. This mechanism is designed to prevent a sudden market flood, giving domestic manufacturers adequate time to adapt to the increased competition. The implementation will be gradual, with the phased reduction expected to begin in late 2026 or early 2027.

The Real Impact on Car Prices

For consumers, the most anticipated outcome is a drop in prices. The deal specifically targets high-value CBU models, which will see the most substantial benefits. For instance, a fully imported luxury vehicle could see its price fall dramatically once the 10% duty rate is fully implemented.

Note: These figures are estimates and apply only to CBU models imported from Europe.

Why Most Luxury Car Prices Won't Drop Overnight

Despite the headline-grabbing tariff cuts, industry leaders have urged caution. A majority of luxury vehicles sold in India are not CBUs but are assembled locally from Completely Knocked Down (CKD) kits. Brands like Mercedes-Benz and BMW have confirmed that over 90-95% of their sales volumes in India come from these locally manufactured models. CKD kits already attract a much lower import duty of around 15-16.5%, so the FTA will have a minimal direct impact on their final showroom prices.

Furthermore, other economic factors could offset the potential savings. The Indian Rupee's depreciation against the Euro, which saw a significant weakening in 2025, could absorb much of the benefit from lower tariffs. Automakers may also choose to reinvest any savings into enhancing their service networks, improving vehicle features, or absorbing rising supply chain costs rather than passing on direct price cuts to consumers.

Strategic Benefits Beyond Price

The true significance of the India-EU FTA extends beyond immediate price reductions. For automakers, it provides a stable and predictable trade framework, encouraging long-term investment in the Indian market. Santosh Iyer, MD and CEO of Mercedes-Benz India, highlighted that the pact will drive technological innovation and sustainable growth, particularly in future mobility.

The agreement is expected to improve the allocation of high-demand global models for the Indian market, giving consumers faster access to the latest technology and niche vehicles. It also strengthens the business case for European manufacturers to deepen their 'Make in India' commitments for both domestic sales and global exports.

The Electric Vehicle Exception

In a strategic move to protect India's growing domestic electric vehicle industry, EVs have been excluded from the tariff reductions for the first five years of the agreement. This gives local players like Tata Motors and Mahindra & Mahindra a crucial window to scale their operations and strengthen their market position before facing direct competition from established European EV brands.

What Consumers Can Expect

While an across-the-board price crash is unlikely, the FTA will undoubtedly make the luxury car market more dynamic. Consumers can look forward to a wider variety of high-performance sedans, premium SUVs, and supercars that were previously unviable due to prohibitive import costs. The downward pressure on CBU prices will gradually make the luxury segment more accessible, potentially expanding its market share from the current 1%.

A Measured Transformation

The India-EU FTA is a monumental step towards liberalizing India's automotive sector. It promises to increase competition, foster innovation, and provide Indian consumers with greater choice. However, the impact on pricing will be gradual and nuanced, primarily benefiting the high-end CBU segment. The long-term vision is to integrate India more deeply into the global automotive supply chain, a goal that this agreement significantly advances.