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Impact of GST Reforms on Car Insurance Premiums

Saumya SrivastavaSept 17, 2025

The GST Council revised the Goods and Services Tax (GST) on individual health and life insurance premiums to zero during its 56th meeting. However, the GST on car insurance remains unchanged for existing car insurance policyholders, and car insurance premiums will still attract 18% GST. Those going for car insurance renewal will have to pay the existing 18% GST.

On the other hand, the GST on certain cars has also been reformed. For new car owners, with reduced GST, the IDV will decrease, and this might lower the car insurance premium as well.

Contents

Impact of GST on Car Insurance Premium
New GST Rates for Cars in 2025
Take Away

Impact of GST on Car Insurance Premium

For existing car owners, there will be no impact on premiums as they will still need to pay 18% GST while renewing their car insurance. However, for new car owners, the reduction in GST on certain types of cars might influence their insurance premiums. This is mainly because the premium depends on the IDV, which is the actual market value of the car. With lower GST on cars, the IDV will decrease, potentially affecting the car insurance premium.

Here's how it will impact different types of car insurance:

Third-party Car Insurance: The premium for the plan type will remain unchanged and will be regulated by the IRDAI.
Comprehensive Insurance: The own-damage component of car insurance might decrease, so would the overall premium of a Comprehensive car insurance policy.

In addition to IDV, there are other factors that affect the car insurance price, such as those listed below:

Car’s Age and Model: Older cars usually have lower premiums, while luxury or high-end models attract higher costs.
Engine Capacity: Vehicles with larger engines are more expensive to insure.
Geographical Location: Cars in accident-prone or urban areas face higher premiums due to increased risk.
Add-ons: Add-ons like zero depreciation, roadside assistance, or engine protection raise the premium of a car insurance policy.
No Claim Bonus (NCB): This is a discount offered for claim-free years, directly affecting the car insurance premium.

New GST Rates for Cars in 2025

According to the new GST reform during the 56th GST Council Meeting, the four-tier GST structure has been changed, reducing it to 5% and 18%. In the automobile sector, the Government has simplified the GST on new cars. The GST rate has been reduced on small and mid-sized cars, while it has increased for luxury cars. These changes will be effective from 22nd September 2025.

The old GST structure meant a base of 28% GST and additional CESS (ranging from 1% to 22%), depending on the vehicle type, engine capacity, and fuel type. With the new GST 2025 reform, the CESS has been eliminated from all vehicle types except for luxury cars. Some of the key highlights of the new GST structure for different vehicle types are as follows:

Vehicle Type	New GST
Small Cars (petrol ≤ 1200 cc / diesel ≤ 1500 cc, length ≤ 4 m)	Reduced from 28% to 18%
Diesel & Diesel Hybrid Cars (≤1500cc and ≤4000mm)	Reduced from 28% to 18%
Luxury and larger hybrid cars	Increased from 28% to 40%
Electric vehicles	No changes

Take Away

The GST reform has thus made it more affordable for those planning to buy a mid-sized or small car. While the GST has been reduced on cars, the GST on car insurance remains unchanged. Other factors, like lower IDV and lower vehicle price, however, might affect the actual premium you pay for a new car that belongs to a non-luxury vehicle type.