Tracking performance and stability play a major role in observer design for speed estimation purpose in motor drives used in vehicles. It is all the more prevalent at lower speed ranges. There was a need to have a tradeoff between these parameters ensuring the speed bandwidth remains as wide as possible. This work demonstrates an improved static and dynamic performance of a sliding mode state observer used for speed sensorless 3 phase induction motor drive employed in electric vehicles (EVs). The estimated torque is treated as a model disturbance and integrated into the state observer while the error is constrained in the sliding hyperplane. Two state observers with different disturbance handling mechanisms have been designed. Depending on, how they reject disturbances, based on their structure, their performance is studied and analyzed with respect to speed bandwidth, tracking and disturbance handling capability. The proposed observer with superior disturbance handling capabilities is able to provide a wider speed range, which is a main issue in EV. Here, a new dimension of model based design strategy is employed namely the Processor-in-Loop. The concept is validated in a real-time model based design test bench powered by RT-lab. The plant and the controller are built in a Simulink environment and made compatible with real-time blocksets and the system is executed in real-time targets OP4500/OP5600 (Opal-RT). Additionally, the Processor-in-Loop hardware verification is performed by using two adapters, which are used to loop-back analog and digital input and outputs. It is done to include a real-world signal routing between the plant and the controller thereby, ensuring a real-time interaction between the plant and the controller. Results validated portray better disturbance handling, steady state and a dynamic tracking profile, higher speed bandwidth and lesser torque pulsations compared to the conventional observer.