Budget 2026 expectations: Boosting EV auto sector

Budget 2026 could extend scope of auto and EV PLI and support Indian companies’ competitiveness.

Key takeaways

Long-term investment in EV and component depends critically on stable and predictable rules.
Budget 2026 could consider increasing the funds for PLIs, including more products and allowing fresh applicants.
EV loan tax breaks, lower interest via priority lending and reducing GST on EV spares can improve affordability.
Industry is also expecting a clear policy roadmap and guidelines on the Sintered Rare Earth Permanent Magnet scheme.
Expanding the scope of Bharat Trade Net and Export Promotion Mission would help auto component makers access foreign buyers and markets.

This Budget may reinforce or expand on the existing green mobility incentives while filling observed gaps like pending FAME III or charging infrastructure funding, rare earth magnet supply, and PLI incentive disbursements.

Parul Nagpal

Partner, Indirect Tax, EY India

For your convenience, a full text transcript of this podcast is available on the link below:

Pallavi

Welcome to Budget Insights, a podcast series from EY India Insights, where we explore perspectives on key policy developments shaping India’s economic landscape. I’m your host Pallavi, and in today’s pre‑Budget episode, we will discuss priorities and expectations ahead of the upcoming Union Budget.

We are pleased to be joined by Parul Nagpal, Partner, Indirect Tax at EY India. In her role, Parul works closely with clients on indirect tax matters across sectors, including the automobile industry, helping them navigate evolving tax regulations and compliance frameworks. Today, she will share her views on what the auto sector and taxpayers should watch for in the forthcoming Budget and the potential implications for indirect tax and industry competitiveness.

Parul, thank you for joining us.

Parul Nagpal

Thank you for having me.

Pallavi

To begin with, what are the key expectations from the Union Budget 2026 for the auto sector, especially as it transitions towards EVs and green mobility?

Parul Nagpal: Recent years have seen rapid growth in India’s electric vehicle (EV) market – EV sales jumped to over 2.0 million in 2024¹. To support India’s EV journey, the government has already launched major programs (FAME I, which was launched earlier, FAME II, PM E-DRIVE) and Production Linked Incentives (PLI) (which are turnover-based incentives) to localize advanced auto and battery manufacturing in India.

A good amount of budget has been allocated for these schemes. For example, approximately INR26,000 crore of budget has been allocated for auto PLI and INR18,000 crore for advanced chemistry cells PLI. In line with the same, now the industry and analysts expect Budget 2026 to keep building on these trends and focus on electric and green mobility.

In reference to that, what in our opinion, we believe that the expectations are around increased subsidies or guarantee for EV adoption, especially for two wheeler and three wheeler segment and commercial vehicle segment; and new incentive for domestic battery Gigafactories; support for charging infrastructure, for example by way of a viability gap funding or tax break. The budget could also reaffirm support for the existing PLI schemes and PM E-DRIVE, by allocating adequate budget outlay or simplifying disbursement, and ensuring central and state alignment on incentives, for example by harmonizing SGST reimbursement in the EV policies and roadmap for guideline and policy for PLI on the manufacturing of Sintered Rare Earth Permanent Magnet, which is the need for the industry.

Further, it is expected that an update on the status of development of a unified digital super app, which is intended to serve as a single platform for EV users across India, is likely to be shared. This app has features of real-time slot booking for batteries, payment integration, charger availability, status and progress dashboard for tracking national development under the PM E-DRIVE scheme.

In continuation of benefits extended in Budget 2025 regarding Customs duty exemption for certain EV components and capital good abatement for EV assembly, industry also expects the government to promote local manufacturing through measures like extending concessional Customs duties and PLI incentives for EV components by continuing the scrappage policy, which indirectly boosts the demand for new vehicle, including EVs, in this Budget.

In sum, it is expected that this Budget would reinforce or expand on the existing green mobility incentives while filling observed gaps like pending FAME III or charging infrastructure funding, rare earth magnet supply, and PLI incentive disbursements to promote the green mobility focus of the Government of India.

Pallavi

Thank you, Parul. How can tax and policy clarity around EV incentives charging infrastructure support long term investment in the sector?

Parul Nagpal

As we discussed, there are multiple measures taken by the government to boost green mobility in the country, ranging from the introduction of PLI schemes, state supported green mobility incentives and PM E-DRIVE scheme. All these schemes are critical not only for promoting adoption of green mobility, but would also support the country by creating long-term investment. Having said that, it is important to note that long-term investment in EV and component depends critically on stable and predictable rules.

Consistent tax incentive rules would lower the perceived risk of investors. If companies know that EV subsidies will not be abruptly withdrawn, they can factor that into reduce the prices, they can factor to reduce GST and customs on input, they would be more confident in expanding their factories and R&Ds in India. Ambiguity or surprises and changes, for example, sudden movement of duty exemptions, could cause capital to flee to other countries.

Some examples of the clarifications that might boost long-term investment in this sector are: while the existing PLI auto and PLI ACC schemes are positive steps, and as of December 24, participating companies have committed over INR25,000 crore of investment in EV and battery infrastructure, the Budget could consider increasing the budget for these PLIs, expanding the eligible products, for example, battery recycling technology, EV charging equipment and new technology products, and allowing fresh applicants in this space.

Second, as the imported battery cost comprises a significant portion of the overall cost of a vehicle, till the battery ecosystem is robust in India, the government may consider relaxing the percentage of DVA (Domestic Value Addition) for the remaining period of the scheme of auto PLI.

Further, the government may consider also extending the period of PLI scheme to enable OEM and factories that have delayed investment to claim the benefit. This investment was delayed primarily due to technology related gaps.

To boost demand and to increase affordability of the product, in addition to the existing measures, to re-introduce income tax exemption deductions for interest cost on EV loans, classify EV loans and priority sector lending to attract lower interest rate, and also to provide tax cost reduction in EV aftermarket, that is, spares and repairs, which attract a higher GST of 18% as compared to 5% on EV sales. These measures are going to support in increasing the affordability of the product by the boosting the demand.

Further, for the manufacturer, the government may consider providing tax holidays and faster depreciation on new component plants to support the additional capital flow.

Fourth, and last, another important point is rare earth magnet, which is a critical component for EVs and is predominantly controlled or regulated by one country, thereby posing significant supply chain disruptions and impacting the green mobility vision of India. On the request of prominent players and industry, Government of India has proposed a new scheme to promote manufacturing of Sintered Rare Earth Permanent Magnet (REPM). With a financial outlay of INR7,280 crore, this scheme aims to establish 6,000 metric tonnes per annum of integrated REPM manufacturing capacity in India, covering the full chain from rare earth oxide to finished magnets. What industry expects is that a clear roadmap for policy and guideline should be issued on priority. This will boost long-term investment in the country in this space.

Pallavi

Thank you, Parul. Now, what role can the Budget play in strengthening India's position in the global auto and auto component supply chain?

Parul Nagpal

The Union Budget plays an important role in positioning India as a global auto manufacturing hub. In recent speeches and trade events, industry leaders have urged the government to enhance global competitiveness through fiscal measures. With India already the world's third-largest automobile market and auto component export exceeding US$23 billion in 2024-25, the Budget can further accelerate this by incentivizing export and localization.

In terms of budgetary measures, by continuing to invest in skills, R&D credits, infrastructure and open trade export missions, the Budget can attract more multinationals and domestic firms to make high-end auto and components here. In turn, a robust manufacturing base with strong MSMEs will drive employment and innovation further.

In addition to the PLI, the Budget can introduce or expand export promotion measures for auto products. For example, enhance RoDTEP (Remission of Duties and Taxes on Exported Products) rates or export credit support for components, followed by reaffirming the commitment for Budget 2025 for Bharat Trade Net and Export Promotion Mission initiatives, which are explicitly designed to integrate India's auto component sector into global supply chain, by allocating funds or expanding their scope. This would help component makers access foreign buyers and market.

In line to that, this week there was an event organized by the government where the government has promised to increase the RoDTEP rate for auto component sectors significantly. And we are hopeful to see that change in this Budget.

With respect to Customs and taxes, rationalizing duties on Customs will improve the cost effectiveness of domestic manufacturing. Budget 2026 could extend this approach to other critical inputs, for example, lowering tariffs on imported high-tech auto equipment not yet produced in India, or raising duties on completely built-up imports where local alternatives exist.

At the same time, measures to offset foreign trade barriers like US import tariffs, perhaps via dialog or subsidy support, would protect exporters’ competitiveness.

More broadly, personal income tax relief, raising exemption limit or standard deduction can also support in boosting consumption, which would indirectly support domestic auto demand and production scale.

Together, these steps would reinforce India's global standing so that India's auto and automotive ecosystem becomes fully integrated into and competitive within global supply chains.

Pallavi

Thank you, Parul. Thank you so much for joining us today and sharing your perspectives on the pre-Budget expectations and the outlook for the auto sector from an indirect tax standpoint.

Parul Nagpal

Thank you.

Pallavi

Thank you to all our listeners for tuning in to Budget Insights part of our EY India Insights. Please stay connected with us for the post-Budget analysis and the commentary on how policy developments may impact businesses and individuals. Until next time, this is Pallavi signing off.

Speaker

Parul Nagpal
Partner, Indirect Tax, EY India

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Episode 07

Duration

13m 16s

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Budget 2026 expectations: Boosting EV auto sector

Key takeaways

Pallavi

Parul Nagpal

Pallavi

Pallavi

Parul Nagpal

Pallavi

Parul Nagpal

Pallavi

Parul Nagpal

Pallavi

Speaker

Parul Nagpal
Partner, Indirect Tax, EY India

In this series

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