The move comes after a volley of dire warnings grocery and transport costs would spike and holiday-makers would stay home if the discounted fuel excise returned in full.
The tax will begin to creep back onto prices at the servo from July 1.
On the same date, truckers will also have to fork out 16 cents per litre on top of the returning excise when the heavy vehicle road user charge makes a partial return.
That translates to $64 more for a 400-litre fuel tank.
Previously set to expire at the end of June, the tax breaks are now being wiped away in increments as part of a plan hatched by the federal government and endorsed by state premiers at a national cabinet meeting on Monday.
The 32 cents per litre discount kicked in on April 1 after the war in Iran and closure of the Strait of Hormuz sent fuel prices soaring.
Petrol prices in capital cities are about $1 a litre lower than they were after the war began on February 28, with diesel now costing about 20c more per litre than when missiles started firing over the Gulf.
Bringing the excise back piecemeal would extend cost-of-living relief and avoid a run on fuel supply, the federal government said on Sunday.
"Australians didn't choose this war, but they continue to face the costs and consequences of it", Treasurer Jim Chalmers said on Monday as he introduced the legislation to extend the excise cut.
"This cost-of-living relief ... is temporary and it is tapered."
States will keep reaching into their GST pockets for 5.7 cents of the now-16 cents a litre discount - also agreed to at Monday's national cabinet meeting.
It comes as farmers and miners push back against calls to cap or scrap the fuel tax credit, which refunds the fuel excise for businesses operating heavy vehicles.
The groups argue they should keep receiving the refund because they don't drive on roads funded by revenue from the fuel excise.
But resources magnate Andrew Forrest called the scheme "a longstanding joke" and said the rebate should be capped at $50 million per business per year.
Fuel tax credits are projected to cost $10.7 billion in the 12 months to July 2027, according to budget papers.
"They represent their own views as a company", Minerals Council of Australia chief executive Tania Constable said on Monday, referring to Mr Forrest's company Fortescue.
"We're in a race for minerals across the world, everybody is hot on our heels."
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