Beyond standard GST and road tax, car owners in India encounter several cess charges that add to the overall tax burden. Understanding these cesses helps in accurate cost calculation and compliance planning throughout the vehicle lifecycle. TDS (Tax Deducted at Source) on car purchases was introduced in the 2025 Union Budget. Buyers purchasing cars above Rs 10 lakh must deduct 1% TDS on the purchase amount and remit it to the income tax department via form 27EQ. This applies to all vehicle categories including new and used cars. The seller receives Form 16B and can claim credit when filing income tax return. For purchases below Rs 10 lakh no TDS applies. Green cess is an environmental charge levied on older vehicles in several states. The rationale is that vehicles over 10 years old emit higher pollution levels and should bear additional costs for environmental remediation. Rates vary by state and vehicle type, typically ranging from Rs 500 to Rs 1,500 annually for cars aged 10-15 years and Rs 1,500 to Rs 3,000 annually for vehicles over 15 years. States like Delhi, Maharashtra, and Karnataka actively enforce green cess on older vehicles. Compensation cess is added on top of the base GST for luxury vehicles and specific categories. This cess was introduced to compensate states for revenue losses from the GST transition. For luxury cars above Rs 10 lakh, a compensation cess of 15-25% of the GST amount applies, effectively pushing the total tax rate on a Rs 50 lakh luxury car above 28%. Road cess is typically embedded within the state road tax structure and funds road construction and maintenance. Some states show road cess as a separate line item while others include it in the overall road tax percentage. This is different from green cess and typically does not increase based on vehicle age. Swachh Bharat Cess at 0.5% was previously applicable on certain services but has been subsumed into the GST structure for most vehicle purchases. Car buyers do not encounter this as a separate charge on vehicle purchases but should be aware that it may apply to add-on services like extended warranty or insurance processed as separate service contracts.

Frequently Asked Questions

1. What is TDS on car purchase and when does it apply?

TDS at 1% applies on car purchases above Rs 10 lakh (effective from 2025). The buyer deducts and remits TDS to the income tax department via form 27EQ before the 15th of the following month. The seller receives Form 16B as proof of TDS deduction and can claim credit against their tax liability when filing ITR. No TDS applies for purchases below Rs 10 lakh.

2. What is green cess on old cars in India?

Green cess is an environmental charge levied on vehicles over 10 years old in several Indian states. It ranges from Rs 500 to Rs 3,000 annually depending on vehicle age, engine capacity, and state. The charge incentivises removal of high-polluting old vehicles from roads and funds environmental initiatives. States like Delhi, Maharashtra, Karnataka and Gujarat actively enforce green cess on older vehicles.

3. Is there a separate cess on luxury cars in India?

Yes, luxury cars above Rs 10 lakh attract a compensation cess of 15-25% of the GST amount in addition to the base GST rate of 18%. This effectively raises the total tax on such vehicles to 22-28% of the ex-showroom price from GST alone. State road tax adds another 10-15% on luxury cars, making the total tax burden on a premium vehicle significantly higher than on standard cars.

4. Can I claim TDS credit on car purchase against my income tax?

Yes, TDS deducted on car purchase can be claimed as credit when filing your income tax return. The amount appears in Form 16B provided by the buyer. If no tax is owed on your total income, the TDS becomes a refund from the income tax department. The credit is available for both new and used car purchases where TDS was deducted.

5. Which states enforce green cess on vehicles?

States actively enforcing green cess include Delhi (Rs 500-2,000 for vehicles above 10 years), Maharashtra (Rs 500-1,500 based on fuel type and age), Karnataka (Rs 500-1,500 for petrol and Rs 1,000-2,000 for diesel vehicles above 10 years), Gujarat, Rajasthan, and Tamil Nadu. Enforcement varies and some states are more active in collecting green cess during annual fitness tests and pollution checks.