Tram travel will be free in the CBD and Docklands from January 1, but unwary passengers who touch on inside the free zone will still be automatically charged for their trip and will need to apply for a refund to benefit from the fare change.

The New Year's Day introduction of a free tram zone, and the capping of zone 1 and 2 train fares at lower zone 1 rates, has also been tipped to increase overcrowding on public transport unless extra services are added to meet demand.

Passengers who touch on inside the free zone will still be automatically charged for their trip.

And while outer suburban commuters will save up to $750 a year on public transport travel in Melbourne under the new policy, zone 1 travellers will save nothing, receiving a 4.8 per cent fare rise instead - almost double the rate of inflation.

"A simpler fare structure across zones 1 and 2 will save commuters up to $750 a year, putting more money back into the pockets of hard working families," Public Transport Minister Jacinta Allan said on Wednesday.