If you’re wondering why the car insurance bill still displays an 18% tax line, you’re not alone. While many of the segments have enjoyed the tax relief in India, the premium you pay for the motor insurance remains unchanged. For many vehicle owners, this can be confusing, as reforms often raise hopes of reduced costs across services, including insurance. This blog will provide some clear insights into the GST in vehicle insurance and the reasons why vehicle insurance still attracts 18% of GST.
What is GST on car insurance?
When you buy a vehicle insurance policy for your vehicle in India, whether it's comprehensive or third party insurance, you pay for the base premium and also the tax called GST (Goods and Services Tax). The current tax rate for the vehicle insurance services is 18%. This rate is uniform for the add-on covers (zero depreciation, engine protection, etc.) and private passenger cars. For instance, if the base premium is ₹10,000 and the GST is at 18%, then you pay ₹11,800 in total.
Recent GST reforms - What changed and what didn’t
India’s GST system went through a massive reform, particularly with the GST 2.0 changes, which became effective from 22nd September 2025. Earlier, four-wheelers attracted a 28% GST along with an additional compensation cess that varied between 1% and 22%, depending on the vehicle type. Under the new GST 2.0 structure, this compensation cess has been removed for most vehicles, leading to lower car prices across various segments. However, luxury cars and vehicles with large engine capacities still fall under the cess category.
For vehicle insurance, the GST rate stayed at 18%. While existing vehicle owners will not see any difference in their car insurance premiums and will continue to pay 18% GST during renewal, new car buyers might experience a slight reduction in premiums due to the recent cuts in overall car prices. Since insurance premiums are calculated based on the Insured Declared Value (IDV), the current market value of the vehicle, a lower IDV for certain car models will naturally result in lower car insurance premiums.
Reasons why car insurance still attracts 18% GST
There are several reasons why there is 18% GST on car insurance premiums:
- ITC and business usage: If the vehicle is used for business, the rules for claiming back the GST (ITC or Input Tax Credit) are different. That’s why not everyone receives a tax reduction automatically.
- Classification as a service: The motor insurance is treated as a service (insurance service) under the GST framework and falls within the 18% slab.
- Shared base premium structure: The premium is made up of many components (add-ons, third-party, own damage), and the tax gets applied uniformly across all of them.
What can policyholders do in this scenario?
Although the tax rate has not changed, you can take certain steps to handle the costs and understand exactly what you’re paying for:
- Compare the premiums: Take a look at the premium breakdown across insurance firms to make sure that you’re not paying more for covers or add-ons that you might not need.
- Business-use vehicles: If you’re GST registered and the vehicle is used for business, you might become eligible for ITC (Input Tax Credit) for insurance GST. Make sure to check the eligibility with a reliable tax adviser.
- Check claim settlement history: A higher premium might be justified if the insurance company has good claim settlement records.
- Choose a higher voluntary deductible: Opting for a higher voluntary deductible, an amount you agree to pay from your pocket during a claim, can reduce your premium. However, make sure it’s an amount you can comfortably afford in case of an accident.
- Monitor the reforms: You should stay alert for any upcoming changes. It is possible that the GST on vehicle insurance might be revisited.
Conclusion
The GST reforms were a welcome relief in several sectors, but the GST on car insurance premiums in India remains at 18%. It’s primarily because vehicle insurance is viewed as a standard service and does not fall under the same tax reduction wave, such as life or health insurance. While this might feel disappointing, you still can make policy choices and get to check out cost-control options. When you stay well-aware of what you’re paying and why, it can help you manage the budget properly and make better decisions.
FAQs
- Does the GST apply to third-party vehicle insurance?
Yes. Third-party insurance also attracts the 18% GST just like the comprehensive ones.
- Will the GST rate on vehicle insurance drop soon?
It might in the future, but currently, it remains at 18% and no formal reduction for vehicle insurance has been announced.
- Is it possible to claim GST paid on vehicle insurance as ITC (Input Tax Credit)?
If the car is used for business and you are GST-registered, you might become eligible. However, it's not eligible for personal use.
- Does the GST affect the claim payout?
No. GST is applied to the premium that you pay. The payout amount or the settlement process in the event of a claim will not change due to GST.
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