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GST Cut to Reduce AC Prices by Rs 2,000-3,000, Offset January 2026 Hike: ICRA

Posted On : 2025-09-25 17:08:25( TIMEZONE : IST )

The recent reduction in the Goods and Services Tax (GST) on room air-conditioners (RACs) is set to lower consumer prices, more than offsetting the anticipated increase in costs due to new energy efficiency norms coming into effect from January 2026. According to ICRA, this price advantage is expected to stimulate demand later in the financial year.

The GST reduction on sub-2-tonne RACs from 28% to 18% is likely to bring down prices by approximately 6-8%, translating into a saving of around Rs. 2,000-3,000 per unit, offering significant incentive for buyers.

Meanwhile, the upcoming Star label guidelines, aimed at enhancing energy efficiency standards, are expected to raise RAC prices by Rs. 500-2,500 per unit. However, the GST-led reduction ensures a short-term net benefit for consumers.

"Effective from January 2026, the new Star label change aimed at enhancing efficiency standards and is expected to raise RAC prices by Rs. 500-2,500 per unit, which would partly offset the benefit arising from reduction in GST rates. However, it may lead to pre-buying in Q3 FY2026 and help the OEMs partly recover the sales lost during the 2025 summer," said Kinjal Shah, Senior Vice President and Co-Group Head, ICRA.

Despite this reduction for consumers, industry volumes are projected to decline by 10-15% year-on-year in FY2026, totalling 11.0-11.5 million units. This follows an unprecedented dampening of summer demand due to unseasonal rainfall.

"ICRA projects volume sales to decline to 11.0-11.5 million units in FY2026 from a record 12.5-13.0 million units in FY2025, reflecting the subdued demand during the peak summer season during April-July. Unseasonal and above-average rainfall reduced the number of heatwave days, resulting in a 15-20% drop in sales volume in April-July 2025, particularly in North and Central India, compared to a robust 40-50% growth in the same period of the previous year. The inherent vulnerability to climate change and unpredictable weather patterns that the industry faces, will thus play out this year."

Looking beyond FY2026, the industry's long-term prospects remain strong, driven by low penetration, increasing urbanisation and replacement demand. Manufacturing capacity is set to expand by 40-50% over the next two years, supported by a capex of Rs. 4,500-5,000 crore. The government's Production-Linked Incentive (PLI) scheme is also expected to significantly enhance indigenisation of components, to 70-75% by FY2028 from the current 50-60%.