Impact of GST Reforms on Car Insurance Premiums

Understanding GST Reforms and Car Insurance

GST reforms refer to the changes announced by the GST Council aimed at simplifying taxes. The latest GST reforms were about reducing tax rates and removing compensation cess on several vehicle categories. 

The main objective behind these reforms is tax simplification. It also aims at boosting vehicle demand by lowering the effective tax burden and improving the ease of doing business. 

The connection between GST and car insurance is two-fold and can be best explained through the following points:

• Insured Declared Value (Direct Link)

Since the latest GST reforms have lowered the tax applied to cars, the car’s ex-showroom price has reduced, and so has the IDV. 

If you’re buying a comprehensive car insurance policy, its ‘own damage’ component will also be reduced, leading to a lower premium. Essentially, whenever the value of a car decreases, the portion of the premium calculated based on that value also decreases.

• Tax-Driven Cost Adjustments (Indirect Link)  

There’s an indirect impact of GST on car insurance premiums, which many overlook. GST reforms don’t just change the car’s sale value but also change the broader cost structure of cars, including manufacturing and the cost of car parts. 

Hence, when GST and cess are reduced, the overall cost of manufacturing and selling cars decreases. You can also notice reductions in the price of particular spare parts and other car components, so car repairs and replacements become more affordable. 

Insurance companies continuously study these trends while setting premiums. If they notice repair and replacement costs dropping, they expect reduced claim payouts. It indirectly lowers car insurance premiums due to GST, even beyond the IDV effect.
 

How GST Rate Changes Affect Car Prices and Insurance Premiums

Changes brought under GST 2.0 impact car prices and car insurance. Since the revised tax slabs have reduced GST rates on small and mid-sized cars and removed cess from all vehicle categories, vehicles now have lower prices and IDV. 

This reduction in the car’s value has led to a proportional decrease in car insurance premiums. The reduction in the ‘own-damage’ premium component is notable as it’s ideally calculated as a percentage of IDV.
 

How Does GST Affect Different Types of Car Insurance?

GST impacts are largely felt on comprehensive car insurance, whereas third-party insurance is minimally impacted. Here’s how - 

• Comprehensive Car Insurance

GST tax rate reductions directly impact comprehensive car insurance premiums because these premiums are partly based on the car’s IDV. If the GST rate is reduced or the cess is removed, the tax benefit is passed down to customers. Hence, the ex-showroom price of cars decreases, which also results in a lower IDV. 

As the own-damage portion of comprehensive insurance is calculated using IDV, the premium also reduces accordingly. 

• Third-Party Insurance (Indirectly or Minimally Impacted)

Third-party insurance premiums are not affected by a car’s IDV because they’re fixed and regulated by IRDAI. So, even if GST reduces the vehicle’s cost, it won’t directly impact third-party premiums. 

However, GST reductions may indirectly influence the premiums over time if the broader cost structures in the automobile sector change. Yet, the premium itself will not automatically decrease when the GST rates on cars are changed.
 

New GST Rates for Cars in 2025

The following GST rates are effective from September 2025. 

Vehicle Category	Criteria	New GST Rates	Old GST Rates
Small cars (Petrol/LPG/CNG/Hybrid)	≤1200cc and ≤4000mm	18%	28% + 1% cess
Small diesel cars	≤1500cc and ≤4000mm length	18%	28% + 3% cess
Large cars and SUVs (Hybrid)	>4000mm and  ≤1200cc (for spark-ignition + electric motor) and ≤1500cc (for compressor-ignition + electric motor)	40%	28% +15-22% cess
Electric motor vehicles	All	5%	5%

 

What Benefits Do GST Reforms Provide to Consumers?

GST reforms 2.0 largely benefit consumers in the three ways listed below -

• Increased Affordability of Cars

A reduction in GST rates and the removal of cess from cars lowers the vehicle’s price, making it more affordable for the general population.  

• Potential Savings on Insurance Premiums

A lower GST rate leads to a reduced IDV. Since the ‘own-damage’ premium component in comprehensive insurance is calculated as a percentage of the IDV, it experiences a proportionate reduction in premium. 

• Making Car Ownership and Insurance More Accessible

Since low GST rates reduce both the vehicle’s purchase cost and comprehensive insurance premiums, more people can afford to purchase cars and get them insured without experiencing any financial strain.
 

Conclusion

The latest GST reforms have been introduced to simplify taxation and make car ownership more accessible to a greater population. Most vehicles have received tax rate reductions, which lower the car’s purchase price and recurring insurance cost. So, now is the best time to become a car owner. 

If you want to enjoy reduced GST-enabled car insurance premiums without compromising the coverage, consider exploring the Shriram Car Insurance policy. We also provide add-on covers, such as roadside assistance and zero depreciation, so you can easily personalise your coverage.
 

FAQs

1.How do GST reforms affect car insurance premiums?

Lower tax rates introduced in the GST reforms make cars more affordable by lowering their purchase/market value. It eventually reduces the IDV, the value on which a percentage of the premium is calculated, resulting in reduced insurance premiums.
 

2.Will insurance renewal premiums also reduce?

For existing policies, renewal won’t automatically translate to reduced premiums. An insurance company will consider the car’s age, model, and other factors to decide the premium on policy renewal.
 

3.What is Insured Declared Value (IDV)?

In simple terms, IDV is the actual market value of a vehicle. In car insurance, IDV is the maximum sum assured by the insurer, which means it’s the maximum amount you will get if your car gets stolen or damaged beyond repair for any reason.
 

4.Why do some insurance premiums remain unaffected by GST changes?

Third-party insurance premiums generally remain unaffected by GST changes because IRDAI regulates their premium. The vehicle’s IDV doesn’t have a role in determining the premium in such cases, so GST changes have no impact.
 

5.How does cess removal affect car prices and insurance?

Cess removal reduces the effective tax on cars, reducing their ex-showroom price. It eventually leads to a lower IDV and, consequently, lower insurance premiums.