How fuel prices are set
What goes into the price of a litre of petrol or diesel, and why tax is the government's main lever now
Tax rates and rules as on 16 October 2026
Verified 16 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask the room who decides the pump price today. Many will say 'the government'. Hold that answer: today oil marketing companies set it from the market, and the government's main lever is tax. This deck has no live pump prices, because retail fuel prices are market price data and we show those only with a lag.
Oil firms formally set pump prices from the market; government taxes it; prices can be held for long spells.
So a pump price has two big parts: a base price that moves with global crude oil and the rupee, and taxes set by the Centre and the state. Dealer commission is a smaller third part.
Trainer notes
This is the whole deck in one line. Everything else fills in the parts: the base price, the two taxes, the dealer's cut, and the history that older decks still carry.
What makes up the pump price
Base price
What the oil company pays for the fuel: refining, margin and freight. It tracks global crude and the rupee.
Central excise
A fixed duty in rupees per litre, set by the Centre. It is the same across the country and does not move with the price.
State VAT
A tax charged by the state as a percentage, so it rises when the base price and excise rise. Rates differ by state.
Dealer commission
What the fuel station earns per litre. The smallest of the four parts, usually a few rupees.
Take-away: Excise and VAT together make up a large share of the pump price, and that share changes over time.
Source: PRS Legislative Research; HPCL published petrol price build-up (Delhi).
Trainer notes
The base price is the only part that moves with global markets every day. The two taxes and the dealer's cut are set by rule, not by the market minute to minute.
A litre of petrol, built up
ASSUMED FIGURES
A worked build-up for one litre of petrol.
All figures are assumed and rounded, to show the method. None is a current rate.
- Base price (refining, margin, freight): ₹55.00 a litre. This is the part that moves with crude oil and the rupee.
- Add central excise ₹13.00 (assumed) and dealer commission ₹4.00: ₹72.00.
- Add state VAT at an assumed 20%: 20% of ₹72.00 = ₹14.40. VAT falls on the base, the excise and the commission.
- Pump price = ₹72.00 + ₹14.40 = ₹86.40. Here the two taxes, ₹13.00 + ₹14.40 = ₹27.40, are nearly a third of it.
Result: Change the tax rates or the base price and the pump price changes. Most of the movement comes from those.
Illustration: every figure here (base, excise, commission, VAT rate) is assumed, not a current rate.
Trainer notes
Do the VAT arithmetic with the room: 20% of ₹72.00 is ₹14.40, and VAT is charged on the whole ₹72, including the excise. States that charge a higher VAT rate end up with a higher pump price for the same base price.
From fixed prices to daily market prices
Administered pricing
For years the government set retail prices and shielded buyers from global swings. Oil companies absorbed much of the gap.
Petrol freed in 2010
Petrol was made market-determined in 2010, so oil companies, not the government, set its price.
Diesel freed in 2014
Diesel followed in October 2014. Both prices now move with global crude oil and the rupee.
Daily revision since 2017
Since 16 June 2017 prices are reviewed daily, but they can stay unchanged for long spells.
Sources: PRS Legislative Research, 'What impacts petroleum prices'; Cabinet decision deregulating diesel, 18 October 2014 (contemporary reports).
Trainer notes
Deregulation does not mean the government has no role. It still sets excise, and it can lean on oil companies informally. But the headline price is now market-linked, not a fixed figure.
Two taxes, and why GST is not one
Central excise
Set by the Centre as a fixed amount per litre. Its special additional duty was cut ₹10 a litre in March 2026, to ₹3 on petrol and nil on diesel.
State VAT
Each state sets its own VAT as a percentage. As a percentage, the rupee amount rises when the base price and excise rise, and rates differ by state.
Outside GST
Petrol, diesel, crude, natural gas and aviation fuel are kept out of GST for now. The GST Council has set no date to include them.
Take-away: The two taxes are set separately, so pump prices differ a lot between states.
Sources: MoF Notification 05/2026-Central Excise, 26 March 2026; PRS Legislative Research, on petroleum and GST.
Trainer notes
Because excise is a fixed rupee amount and VAT is a percentage, a rise in the base price raises VAT automatically but not excise. This is why two states with different VAT rates show different pump prices on the same day.
Oil bonds: a piece of history
Older material talks a lot about 'oil bonds'. Here is what they were and why they no longer matter today.
What they were
Under administered pricing the government owed oil companies for selling below cost. Some of this was paid not in cash but in bonds — the 'oil bonds'.
When
They were issued between 2005 and 2010. About ₹1.4 lakh crore was issued; roughly ₹1.3 lakh crore stayed outstanding for years.
Now repaid
The last of these bonds were due to mature by 29 March 2026. The Budgets for 2025-26 and 2026-27 list none left, so they no longer sit on prices.
Sources: Union Budget 2025-26 and 2026-27, Receipt Budget, Annexure 6 (bonds due for discharge); BOOM fact-check of the 2005-10 issue.
Trainer notes
Oil bonds never set the pump price directly. They were a way to delay a cost. Whether that cost still 'keeps prices high' was long debated; with the bonds now repaid, that argument no longer applies.
Where things stand
Tax rules and status as on 16 October 2026. These change when the Centre, the states or the GST Council act.
- EXCISE (SAED), PETROL
- ₹3/lCut from ₹13 on 26 March 2026. Other duties apply.
- EXCISE (SAED), DIESEL
- NilCut from ₹10 on 26 March 2026. Other duties apply.
- GST ON FUEL
- NoneKept out of GST; the Council has set no date to include it.
- OIL BONDS (2005-10)
- RepaidLast matured by March 2026. None left in the 2026-27 Budget.
Sources: MoF Notification 05/2026-Central Excise; PRS on GST; Union Budget 2025-26 and 2026-27 receipts (oil bonds).
Trainer notes
These are tax rules and fiscal facts, not market prices, so they are the latest available. We deliberately show no live pump price here, because retail fuel prices are market data shown only with a lag of at least 30 days.
If you learnt this from older material
What older decks say
- The government fixes the pump price.
- Oil companies are paid in oil bonds, not cash.
- Oil bonds keep prices high for years.
- Prices change every fortnight.
What holds now
- Oil companies set prices: petrol 2010, diesel 2014.
- Administered pricing has ended.
- The oil bonds were fully repaid by March 2026.
- Prices are revised daily, since 16 June 2017.
Take-away: The framework changed: market pricing, daily revision, and oil bonds now history.
Sources: PRS Legislative Research explainer; Union Budget 2026-27 receipts.
Trainer notes
Older training decks were written during administered pricing and the oil-bond years. The concepts they teach are still useful history, but the live picture has moved on.
Four things people get wrong
Misconception'The government sets the pump price.'
What is trueNot formally since petrol was freed in 2010 and diesel in 2014. Oil companies set prices; the government's main lever is tax.
Misconception'Oil bonds still keep fuel prices high.'
What is trueThe oil bonds of 2005-2010 were fully repaid by March 2026. They are no longer a cost sitting on today's price.
Misconception'A price rollback is a free win.'
What is trueIf a price is held below cost, someone bears the gap: the oil companies, or the government through lower tax revenue.
Misconception'Petrol and diesel are taxed alike.'
What is trueCentral excise differs by fuel (SAED: ₹3 petrol, nil diesel) and every state sets its own VAT, so prices differ.
Check yourself
Question 1: A litre of petrol has a base price of ₹50, central excise of ₹13, dealer commission of ₹3, and state VAT of 20% on the rest. What is the pump price?
Answer: ₹50 + ₹13 + ₹3 = ₹66. VAT 20% of ₹66 = ₹13.20. Pump price = ₹66 + ₹13.20 = ₹79.20. (Assumed figures, for the method.)Question 2: Who sets the retail price of petrol and diesel today, and since when?
Answer: Oil marketing companies set them from the market — petrol since 2010 and diesel since October 2014 — and revise them daily since 16 June 2017.Question 3: What were 'oil bonds', and do they still affect fuel prices?
Answer: Bonds the government gave oil companies (2005-2010) instead of cash to cover selling below cost. The last were repaid by March 2026, so they no longer affect prices.
Sources and disclaimer
Sources for the figures in this explainer
- Petrol made market-determined in 2010, diesel in October 2014, daily revision since 16 June 2017: PRS Legislative Research, 'What impacts petroleum prices'.
- SAED on petrol cut from ₹13 to ₹3 and on diesel from ₹10 to nil, 26 March 2026: MoF Notification 05/2026-Central Excise (it had risen ₹2 in April 2025).
- Petrol, diesel, crude, natural gas and ATF kept outside GST, no date set by the GST Council: PRS explainer; Finance Minister's reply in Parliament, March 2021.
- Oil bonds of about ₹1.4 lakh crore issued to oil marketing companies, 2005-06 to 2009-10; about ₹1.3 lakh crore outstanding for years: contemporary fact-checks (BOOM, Scroll, Factly).
- Last oil-company special bonds due 29 March 2026; none due in 2026-27: Union Budget 2025-26 and 2026-27, Receipt Budget, Annexure 6.
- The petrol build-up on slide 4 and the quiz use assumed, rounded figures; none is a current rate.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).