This paper presents a new real-time inductance estimation method for 3-phase permanent magnet synchronous machine (PMSM), utilizing a physics-based inductance observer. The mathematical modeling, stability analysis, and transient analysis of the observer are developed and described in details. The inductance of a 3-phase, 250 W, radial flux PMSM was calculated by an electromagnetic field-circuit based finite-element analysis with motion. The numerical results are compared with the experimental results obtained from the developed inductance observer. The results show excellent agreement in steady state operating conditions.