India plans to slash tariffs on cars imported from the European Union to 40 per cent from as high as 110 per cent, sources said, in the biggest opening yet of the country's vast market as the two sides close in on a free trade pact that could come as early as Tuesday.

Prime Minister Narendra Modi's government has agreed to immediately reduce the tax 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 told Reuters.

This will be further lowered to 10 per cent over time, they added, easing access to the Indian market for European automakers such as Volkswagen, Mercedes-Benz and BMW.

The sources declined to be identified as the talks are confidential and could be subject to last-minute changes. India's commerce ministry and the European Commission declined to comment.

Pact already dubbed 'mother of all deals'

India and the EU are expected to announce on Tuesday the conclusion of protracted negotiations for the free trade pact, after which the two sides will finalise the details and ratify what is being called "the mother of all deals.

The pact could expand bilateral trade and lift Indian exports of goods such as textiles and jewellery, which have been hit by 50 per cent US tariffs since late August.

India is the world's third-largest car market by sales after the US and China, but its domestic auto industry has been one of the most protected.

New Delhi currently levies tariffs of 70 per cent and 110 per cent on imported cars, a level often criticised by executives, including Tesla chief Elon Musk.

New Delhi has proposed slashing import duties to 40 per cent immediately for about 200,000 combustion-engine cars a year, one of the sources said, its most aggressive move yet to open up the sector. This quota could be subject to last-minute changes, the source added.

Battery electric vehicles will be excluded from import duty reductions for the first five years to protect investments by domestic players like Mahindra & Mahindra and Tata Motors in the nascent sector, the two sources said. After five years EVs will follow similar duty cuts.

Market 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 locally manufacture cars in India but have struggled to grow beyond a point in part due to high tariffs.

Lower taxes will allow carmakers to sell imported vehicles for a cheaper price and test the market with a broader portfolio before committing to manufacturing more cars locally, said one of the two sources.

European carmakers currently hold a less than 4 per cent share of India's 4.4-million units a year car market, which is dominated by Japan's Suzuki Motor as well as homegrown brands Mahindra and Tata that together hold two-thirds.

With the Indian market expected to grow to 6 million units a year by 2030, some companies are already lining up new investment.

Renault is making a comeback in India with a new strategy as it seeks growth outside Europe, where Chinese carmakers are making strong inroads, and Volkswagen Group is finalising its next leg of investment in India through its Skoda brand.