What is Car Depreciation
The depreciation of a motor vehicle is the loss in the value of the vehicle over time due to wear and tear. It kicks in as soon as you take delivery of a vehicle, and increases as the vehicle continues to age. In short, car depreciation is the difference in the total value of the car when it is purchased and sold. Vehicle depreciation directly impacts the Insured Declared Value (IDV) and also causes depreciation on the cover leading to change in insurance premiums. The Insurance Regulatory and Development Authority of India (IRDAI) has standardised the depreciation rates on cars. Depending on the car depreciation rate applicable for your car, the car insurance premium and the amount that you receive when you file a car insurance claim may vary.
An Overview of Depreciation Rates on Car
In the table below, you will get a better understanding of how much a car depreciates in its value, percentage-wise over different periods of time:
The Car’s Age |
The Percentage of Depreciation for Calculation of IDV |
Less than 6 months |
5% |
More than 6 months but not above 1 year |
15% |
More than 1 year but not above 2 years |
20% |
More than 2 years but not above 3 years |
30% |
More than 3 years but not above 4 years |
40% |
More than 4 years but not above 5 years |
50% |
A fact to note is that the vehicle depreciation rate for distinctive components of your car are assessed separately. The depreciation rate of motor vehicles that is mentioned in the previous table serves the purpose of identifying the Insured Declared Value of any given car.
Factors that Cause a Car to Depreciate
Many factors add to car depreciation over time. Some of them are:
As the age of the car increases, car depreciation also increases. The value of the car too decreases over the years. Also, the physical condition and mileage of the car are calculated as per the age of the car.
Luxury cars have a higher vehicle depreciation rate compared to smaller and generic cars. It is because their maintenance and price of the parts are more expensive.
If the car is maintained well, the depreciation value of the car will be lower. In case your car has significant bodywork or interior issues, you can expect a higher car depreciation rate.
The fuel efficiency of the car:
If your car is fuel efficient, it will have a good resale value. The rate of car depreciation in India for such cars is calculated low.
When the vehicle depreciation rate in India is calculated, it is better to have a fewer number of previous owners. The fewer owners, the better the car's value.
How to Calculate Car Depreciation
Indian insurers provide you a car depreciation calculator for car valuation, or an IDV calculator on their respective websites. A car depreciation calculator in India computes vehicle depreciation and helps you to determine your used vehicle cost after you factor in the rate of depreciation.
In other words, the IDV calculator makes use of the age of your car, its condition, and mileage, in order to determine the valuation of your vehicle presently. It does this instantly.Such a tool can be tremendously useful when you wish to sell your car or buy car insurance when you have a second-hand vehicle.
What’s more, the tool is extremely easy to operate. You only have to enter the registration number of your car, the year of its manufacture, the brand and model of the car, the resident city/registration, etc. Sometimes, to generate more accurate results, several car depreciation calculators suggest that you enter the mileage and details concerning the car’s general condition. Calculating car depreciation rate in India using this tool produces results that give you insights into the following:
Amounts you will have to receive, or pay, while selling, or buying, any given vehicle.
Amounts to consider while trading your car at any dealership.
IDV insurance and costs of car insurance premiums.
If you wish to calculate the motor depreciation of your car by yourself, you may be able to do so using any of the following formulas:
1.Calculating car depreciation by using the Prime Cost Technique
The formula:
The cost of running the car X (number of days the car is owned ÷ 365)
X (100% ÷ effective life in number of years)
By using this method, the depreciation of the car is calculated as a set percentage of its total cost.
2.Calculating car depreciation by using the Diminishing Value Technique
The formula:
The purchase value of the car X (number of days the car is owned ÷ 365)
X (effective life in number of years ÷ 200%)
In this method, the car depreciation per year is calculated using the car’s base value.
How to Reduce Car Depreciation
Tricks to reduce your car’s depreciation exist and these aid in the maintenance of its value. Consequently, you can get an IDV and a resale value that is high:
Keep your car spruced up and maintained. This prevents wear and tear. Regular servicing is a must too.
Make sure you purchase cars with a high resale value. Specific brands and kinds of vehicles have more resale value than others.
You can buy a used car in mint condition. This means that even if it is a second-hand vehicle you are buying, it is already in good condition and its further resale value will be high.
Run your car on shorter distances. The more kilometres that your vehicle travels, the more it gets depreciated in value.
To Conclude
If you maintain your car well enough or buy a car with a good resale value, you can always minimise car depreciation and get a higher resale value for your car. However, if you buy a zero depreciation cover as an add-on to your comprehensive car insurance, you can claim the amount that is deducted as depreciation under this cover and get repaid. A trusted platform like Bajaj Markets can help you choose the right insurance cover from some of the biggest insurance providers in India.
