Pay-as-you-drive (PAYD) insurance policies allow low-mileage drivers to pay premiums based on actual kilometers driven rather than fixed annual rates. According to reports from Mint, under a PAYD policy, drivers choose a kilometre slab at the start of the policy year, typically ranging from 2,500 km to 10,000 km, based on expected annual usage. To determine eligibility, drivers should calculate their average annual distance by dividing their odometer reading by their car's age. The policy remains valid as long as drivers stay within the selected kilometre limit and pay applicable premiums, with insurers reviewing actual usage at renewal and potentially offering unused kilometres to be carried forward.
PAYD policies calculate premiums by combining IRDAI-prescribed third-party premiums with own-damage premiums split into fixed and variable components. As reported by Mint, discounts on the variable component vary significantly across insurers, with HDFC Ergo capping savings at 25% of the own-damage premium, while Digit offers discounts of up to 90% for customers choosing the lowest kilometre slabs. The variable component is directly linked to the chosen kilometre slab, making premiums more flexible based on actual usage patterns.
When drivers exceed their chosen kilometre slab, they may need to pay additional premiums, and own-damage claim honoring depends on policy terms and conditions. According to Aakansha Jain Nahar from ILM Research, most PAYD policies require customers to purchase top-ups when kilometre limits are exhausted, and claims may become inadmissible if limits are exceeded. For example, if a customer receives a 10% premium discount for choosing a 10,000 km limit and their vehicle crosses 11,000 km at claim time, the claim amount may be settled at 90% of admissible liability.
Despite potential savings, PAYD adoption remains low in India due to limited awareness and heavily discounted motor insurance premiums. As reported by Abhishek Bondia from SecureNow, a hypothetical comparison shows a car owner choosing the 12,000 km slab pays ₹6,844 annually compared to ₹7,409 for unlimited kilometres, a difference of just ₹565. Bondia notes that given existing discounts through no claim bonus (NCB) and insurer competition, the incremental savings may not be compelling enough for most car owners. However, PAYD could benefit those with very low usage or living abroad who typically only opt for mandatory third-party cover.
Experts recommend that buyers calculate their actual usage through odometer readings, service records, or fuel and trip history before selecting a realistic kilometre slab. According to ILM Research, the biggest mistake is choosing the lowest slab purely for premium savings without realistic usage estimation. PAYD may not suit daily commuters, frequent long-distance travelers, or those with varying driving patterns year-round. However, for drivers with low, predictable annual usage, comparing PAYD quotes across insurers before renewal could yield substantial savings, making comprehensive coverage more affordable for those who previously opted for only mandatory third-party cover.
