Understanding GST's Impact on Vehicle Insurance Premiums and Claims
This article provides a detailed explanation of GST's role in motor vehicle insurance. It covers the application of GST to vehicle insurance premiums, including specific rates for passenger and goods carriage vehicles, along with Input Tax Credit (ITC) eligibility. The document further clarifies that GST is generally not applicable to the payouts received from motor vehicle insurance claims. Additionally, it examines how GST applies to the salvage value of damaged vehicles, depending on the claim settlement process.
Vehicle owners consistently incur expenses, including motor vehicle insurance, regardless of their usage frequency. Recently, motor vehicle insurance premiums have increased, with some linking this rise to elevated Goods and Services Tax (GST) rates. Furthermore, there is a need for clearer guidance regarding GST's application to insurance claims for motor vehicles. This article provides a comprehensive overview of how GST affects vehicle insurance premiums, claims, and the salvage value.
Recent Regulatory Change The 56th GST Council meeting introduced significant changes, effective September 22, 2025, and formally announced by the CBIC on September 17, 2025. Notably, the GST rate on third-party insurance for commercial 'goods carriage' vehicles has been lowered from 12% to 5%, and Input Tax Credit (ITC) remains applicable.
GST Application to Vehicle Insurance Policies
Insurance represents a formal agreement that safeguards an individual or entity from specified financial losses. This service is provided by an insurer in exchange for a premium payment.
The GST Act classifies transactions between insurers and insured parties as service provision. For passenger vehicle insurance, the applicable GST rate is typically 18%.
Illustration: Consider an individual, Mr. X, who purchases a new car valued at ₹6,00,000. He secures vehicle insurance for the same Insured’s Declared Value (IDV) of ₹6,00,000, with a premium of ₹15,000. Under GST regulations, an 18% GST applies to this premium.
- Therefore, Mr. X’s total payment will be ₹15,000 + (₹15,000 * 18%) = ₹17,700.
- The GST component paid by Mr. X on his vehicle insurance premium amounts to ₹2,700 (₹17,700 - ₹15,000).
For third-party insurance covering 'goods carriage' vehicles, the GST rate was 12% with ITC until September 21, 2025. Effective September 22, 2025, this rate has been lowered to 5%, also with ITC eligibility.
Case Study: Rakesh Transports Pvt Ltd, a Goods Transport Agency (GTA) in Tamil Nadu, renewed third-party insurance for its five-truck fleet. The base premium per truck was ₹10,000. For policies started before September 22, 2025, the GST was ₹1,200 per truck (12%). For policies initiated on or after September 22, 2025, the GST is ₹500 per truck (5%), with ITC available for both periods.
Input Tax Credit Eligibility for Vehicle Insurance Premiums
Input Tax Credit (ITC) under GST permits businesses to offset the tax paid on purchases of goods and services against the tax collected on their sales.
- GST paid on motor vehicle insurance for commercial vehicles qualifies for ITC.
- However, GST on motor vehicle insurance for private passenger vehicles is generally not eligible for ITC.
GST Implications for Motor Vehicle Insurance Claims
Claims made under an active motor vehicle insurance policy are legally binding rights of the insured party or policyholder. These claims are intended to compensate for financial losses endured, in accordance with the policy's defined terms and conditions.
Under the GST Act, such claims are considered 'actionable claims.' Paragraph 6 of Schedule III specifies that actionable claims are not classified as either a supply of goods or services. Consequently, GST is not levied on payments received from motor vehicle insurance claims.
Scenario: Mr. X's car sustained damage after an accident, leading to repair costs of ₹15,000. He submitted an insurance claim to ABC Insurance. Following an assessment, the insurer paid the repair expenses of ₹15,000.
- Mr. X is not required to pay any GST on the ₹15,000 reimbursement received from the insurance provider.
GST on Salvage Value within Motor Insurance Claims
In motor vehicle insurance, 'salvage value' refers to the amount an insurer can obtain by selling a vehicle that has been severely damaged or completely destroyed, typically during the settlement of an insurance claim.
The Central Board of Indirect Taxes and Customs (CBIC) clarified the GST treatment of salvage/wreck value identified during the claim assessment for vehicle damage through Circular no. 215/9/2024-GST, dated June 26, 2024.
Illustrative Case: Mr. X's vehicle was involved in an accident, rendering it irreparable. He seeks to recover the car's Insured's Declared Value (IDV) of ₹6,00,000 from his insurer. Following inspection and evaluation, the insurer agrees to pay Mr. X the IDV.
Claim settlement can occur in two primary ways:
- Method 1: The insurer directly transfers the full claimed amount to Mr. X without subtracting the salvage value of the damaged car, and subsequently takes ownership of the vehicle. In this scenario, the damaged vehicle becomes the insurer's asset.
- Method 2: Alternatively, the insurer may disburse the claimed amount to Mr. X after deducting the salvage value. Here, Mr. X retains ownership of the damaged or destroyed vehicle.
The application of GST to salvage value in motor insurance claims varies based on the chosen settlement method:
- If the insurer acquires the vehicle and later sells it, the insurer is responsible for paying outward GST on the salvage value.
- If the insurer settles the claim by reducing the salvage value from the payout, there are no GST implications for the insurer regarding the salvage value.