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GST Rate Changes and Their Impact on Car Buyers

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The Indian government, in order to promote consumption and improve economic efficiency, has announced major reforms to the Goods and Services Tax (GST) regime. GST 2.0 refined the tax structure for cars by keeping a concessional 5% rate for EVs, lowering the rates for smaller cars to 18% and levying a 40% rate on other vehicles.

Among the various changes brought along by the GST 2.0, it had one of the biggest impacts on the Indian automobile industry. In this blog, we have explained the latest GST reforms, highlighted the changes in car prices across popular car makes and models and discussed the impact of the new GST on car insurance.

Understanding the Revised GST Rates on Four-Wheelers

Recently, the government under GST 2.0 has overhauled the 28% taxation structure applicable to four-wheelers. This resulted in a reduction in car prices across categories. 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%.

The earlier compensation cess, ranging from 1% to 22%, has also been reduced with this new reform. Here is a tabular presentation of the changes:

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.

Impact of GST Cut on Car Insurance

The car insurance GST rate has stayed the same, even with the implementation of the recent reforms. While existing car owners will see no difference and keep paying the 18% car insurance GST rate during renewal, new car buyers may see lower policy premiums due to reductions in GST on cars.

Here’s how the GST cut may impact the different car insurance policies:

1. Third-party car insurance:

The premium for third-party car insurance is set by the IRDAI based on the vehicle’s engine or battery capacity, so it won’t change due to the recent GST revision.

2. Comprehensive car insurance:

Comprehensive insurance comes bundled with third-party liability cover and own damage cover. The lower purchase price of some cars due to GST 2.0 may slightly lower the IDV of the vehicle. Since the IDV, i.e., the current market value of the vehicle, is one of the factors influencing insurance premiums, you may see a reduction in the price of the own damage component of the car insurance.

The Indirect Impact of the New GST on Car Insurance

One of the major impacts of the revised GST on car insurance is an indirect one. Now that individuals can buy four-wheelers, especially small cars, at lower prices, they can easily consider investing their extra savings into a robust car insurance policy. For example, a comprehensive car insurance with essential add-ons, such as zero depreciation and roadside assistance, has now become a highly lucrative option for new car buyers.

Other Factors Affecting Car Insurance Price

Beyond IDV, other factors that usually impact car insurance premiums are:

1. Geographical Location:

If you live in an accident or theft-prone area, the insurer may charge higher premiums due to the elevated risk of damages and losses.

2. Add-On Covers:

Add-ons in car insurance, such as zero depreciation, engine protection, roadside assistance, and return to invoice cover, provide additional protection but also increase your overall policy premiums.

3. Safety Devices:

Cars fitted with advanced braking systems, airbags, and GPS-enabled anti-theft devices are less likely to suffer severe damage or theft. Insurance companies recognise this lower risk and usually provide discounts on premiums.

4. Voluntary Deductible:

A voluntary deductible is the part of the claim amount you agree to pay from 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.

Conclusion

The GST overhaul, effective from September 22, 2025, has restructured taxation on cars entirely. If you are looking to buy a small car in the coming months, you stand to gain the most in terms of savings, while luxury car buyers will see fair savings. The GST reduction will not only make four-wheelers affordable but may also reduce car insurance premiums. The rate slash is expected to encourage car owners to secure their vehicles against incidents like theft, fire, natural disasters, or accidents by investing in comprehensive car insurance.

Disclaimer: The above information is for illustrative purposes only. For more details, please refer to the policy wordings and prospectus before concluding the sales.

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