The decision caps more than a year of deadlocked talks with government representatives as Tesla sought to first test demand by selling electric vehicles (EVs) imported from production hubs in the United States and China, at lower tariffs.
But the Indian government is pushing Tesla to commit to manufacturing locally before it will lower tariffs, which can run as high as 100% on imported vehicles.
Tesla had set itself a deadline of Feb. 1, the day India unveils its budget and announces tax changes, to see if its lobbying brought a result, the sources with knowledge of the company's plan told Reuters.
When Prime Minister Narendra Modi's government did not offer a concession, Tesla put on hold the plans to import cars into India, added the sources, who sought anonymity because the deliberations were private.
For months, Tesla had scouted for real estate options to open showrooms and service centres in the key Indian cities of New Delhi, Mumbai and Bengaluru but that plan is also now on hold, two of the sources said.
Tesla did not respond to an email seeking comment.
An Indian government spokesman did not immediately respond to a request for comment.
Tesla has assigned additional responsibilities for other markets to some of its small team in India. Its India policy executive Manuj Khurana has taken on an additional "product" role in San Francisco since March, his LinkedIn profile shows.
As recently as January, Chief Executive Elon Musk had said Tesla was "still working through a lot of challenges with the government" in regard to sales in India.
But the strong demand for Tesla's vehicles elsewhere and the standoff over import taxes prompted the shift in strategy, the sources said.
Modi has sought to lure manufacturers with a "Make in India" campaign, but his transport minister, Nitin Gadkari, said in April it would not be a "good proposition" for Tesla to import cars from China to India.
But New Delhi had clinched a win in January, when German luxury carmaker Mercedes-Benz said it would start assembling one of its electric cars in India.
Tesla had looked to gain an early advantage in India's small but growing market for electric vehicles, now dominated by domestic automaker Tata Motors.
Tesla's price tag of $40,000 at minimum would put it in the luxury segment of the Indian market, where sales make up just a tiny fraction of annual vehicle sales of about 3 million.
(Reporting by Aditi Shah; Additional reporting by Aditya Kalra; Editing by Kevin Krolicki and Clarence Fernandez)
By Aditi Shah