How Do Revised GST Rates Affect Car Buyers?

GST, as you may already know, stands for the Goods and Services Tax. This new system of taxation came into effect on 1st July 2017 and brought the Indian tax system under one big umbrella. It is important to know that before GST, car taxes were far more than what they are now. GST on cars is believed to have streamlined the rates.

The new rate revision: small cars that meet specified engine and length criteria attract 18% GST, while larger and luxury vehicles are taxed at 40%. Electric vehicles continue to attract 5% GST.

As the goods and services tax is a part of a car’s ex-showroom price, the rates directly impact the total cost. The GST that applies can vary depending on several factors.

Let us take a look at some of the key factors that decide how much GST a vehicle would typically attract:

1. Engine

Just like a car’s price, the GST also depends on its cubic capacity. For example, petrol cars up to 1,200cc and diesel cars up to 1,500cc can qualify for the lower GST rate.

2. Fuel

GST applicability also depends on the type of fuel used by the vehicle, which could be petrol, diesel or electric.

3. Car length

Along with a car’s CC, the prescribed vehicle-length limit is also considered.

4. Car category

SUVs and premium vehicles may fall under the higher 40% GST slab.

A car’s price depends largely on its cubic capacity, and it is also one of the key factors that affect the GST it attracts. Effective September 22, 2025, small cars with 1200 cc petrol engines, 1500 cc diesel engines, and a size of under four metres will attract 18% GST. Luxury vehicles and large SUVs were put under the GST slab of 40%.

Not only that, earlier four-wheelers used to attract a compensation cess ranging from 1% to 22%.

Another important factor that affects a car’s cost and its GST is the type of fuel it uses. Petrol cars with engines up to 1200 cc and diesel cars with up to 1500 cc attract the lower 18% GST rate. Electric vehicles continue to attract 5% GST.

If you are planning to buy a second-hand car, then you need to know that GST is applied at a flat rate of 12%. Here, however, the tax is applied to the dealer’s margin.

Recently, the government under GST 2.0 has overhauled the 28% GST structure applicable to four-wheelers, resulting in lower tax rates across several vehicle categories. Under the new reform, the compensation cess has also been reduced, further lowering the overall tax burden on eligible vehicles.

Here is a tabular presentation of the changes:

This also means that the revised GST structure can influence the overall cost of purchasing and owning a vehicle, including the associated insurance cost.

Change in Car Prices of the Major Brands

Following the GST rate cut, car manufacturers have decided to pass on the full benefits to customers. Here is how much you can save on different car models based on the new rates.

Car insurance premiums are directly linked to the ex-showroom price of a vehicle, which includes GST. This means the GST rate cut will also bring down the insurance cost. However, it is important to note that the own damage component of car insurance will become more affordable, while the third-party car insurance premium will remain unchanged. This is because the premium for third-party liability cover is decided by the Insurance Regulatory and Development Authority of India (IRDAI) and is based on the vehicle's engine displacement, regardless of the make and model you own.

Apart from the impact of GST and vehicle pricing, several other factors can affect your car insurance premium, including:

Geographical Location

If you live in a metropolitan city with dense traffic, frequent accidents, and high car theft cases, you may have to pay a higher premium due to the risk involved. Remember that insurers maintain detailed up to date regional data on accident statistics, claim ratios, and theft reports, which they use to calculate the premium.

Type of Fuel Used

The fuel type of your car influences both repair costs as well as the associated risks. Diesel cars generally attract higher premiums compared to petrol cars since their engines are more expensive to repair. CNG and LPG vehicles, if fitted externally, may also increase the premium because of additional fire and explosion risks.

Add-On Covers

Add-on covers in car insurance are optional benefits you can purchase with your comprehensive policy for additional protection. Available for an additional premium, depending on your needs, you can pick from zero depreciation, engine protection, roadside assistance, and/or return-to-invoice cover.

Safety Devices

Cars fitted with advanced braking systems, airbags, and GPS-enabled anti-theft devices are generally less likely to suffer significant damage or be stolen. Insurance companies recognise this lower risk and may offer discounts on the premium. However, discount benefits are available only if the device is recognised by the Automotive Research Association of India (ARAI).

Voluntary Deductible

A voluntary deductible is the portion of the claim amount that you agree to pay out of your own pocket before the insurer contributes. If you opt for a higher deductible, your insurer’s liability decreases, leading to lower premiums. However, this also means you bear more expenses during an actual claim.