What is Car Depreciation Rate?

  • Author :
  • TATA AIG Team
  • Published on :
  • 29/09/2023

Buying a car is an exciting experience and a dream come true for many. Having your own car gives your family and you the freedom to travel safely at your time without having to depend on public transport. But it is often an expensive business, particularly if you are trying to get a luxury car. In such cases, people choose to buy used cars because their values have depreciated, and they can get good cars at lower prices.

With that said, whenever you purchase a car, you should be aware of its depreciation rate — how fast or how much will it lose its price value after a certain period of time. It will help you get better deals when selling your used car. There are several other aspects you need to consider when buying a car, and purchasing a car insurance policy is one of them.

Buying a four-wheeler insurance policy is mandatory under the Motors Vehicle Act 1988. It protects the vehicle owner from the financial liabilities of an accident, theft, or any other damage to the car and car owner. Buying car insurance also requires you to understand the concept of car depreciation rate.

Read further to get complete information on the car depreciation rate in India.

What is Motor Vehicle Depreciation

Car or motor vehicle depreciation rate is the reduction in the vehicle’s value over its life due to wear and tear. Depreciation in the car’s value starts as soon as you take the delivery of your vehicle from the car dealer and increases with the increase in its age.

Car depreciation rate can also be understood as the difference between the car’s value when you bought and sold it.

Does Car Depreciation Per Year Affect Car Insurance Premium

Depreciation in the car’s value affects its Insured Declared Value (IDV). The purchase year of the vehicle, its routine wear and tear, and useful life decide the car depreciation percentage. In addition, depreciation affects the compensation coverage you can get on your car against a claim.

The Insurance Regulatory and Development Authority of India has standardised the depreciation rates on four-wheelers. The depreciation rate for individual components and spares is assessed separately.

Here are the depreciation rates for some spares and components:

Component Depreciation Rate (%)
Rubber, Nylon, and Plastic spares 50
Battery 50
Fibreglass components  30

The normal depreciation rate for cars over different periods is as follows:

Age of Four-wheeler Depreciation Rate for Determining IDV (%)
Less than 6 months 5
Between 6 months and 1 year 15
Between 1 year and 2 years 20
Between 2 years and 3 years 30
Between 3 years and 4 years 40
Between 4 years and 5 years 50

Factors Affecting Car Depreciation Rate

Several factors affect the car depreciation rate, such as

Car’s make and model Luxury and expensive cars have a higher depreciation rate than smaller and generic four-wheelers. It is because such cars’ spare parts and maintenance are more expensive.

Car’s age A car’s depreciation rate increases with its age. The vehicle’s physical condition, mileage, and value also depend on its age.

Maintenance and repairs A well-maintained car has a lower car depreciation value. On the other hand, a car having several bodywork or interior issues will have a higher depreciation rate.

Fuel efficiency A car with a better fuel economy has a higher resale value and a lower depreciation rate.

Previous owners If a car has been under a single ownership or has had very few owners, its resale value will be higher, and its depreciation value will be lower.

How Car Depreciation Rate Affects Car Buyers and Sellers

A car’s depreciation rate affects both car buyers and sellers. So let’s have a look at how this happens:

Effect on buyers: Car buyers often aim to buy a car with the lowest possible price. However, it is advisable to buy a car with a low depreciation rate instead. You may have to pay a slightly higher amount for such a car, but you will easily recover it when selling it.

Moreover, when you buy a second-hand car, buying a car with a low depreciation value means the car is well-maintained and reliable. Therefore, select a car with a lower depreciation value instead of the cheapest available car.

Effect on sellers: When selling a car, you will get a higher price for a well-maintained car. A car with a lower depreciation rate will fetch a better price in the resale market. Therefore, buy a car from a reputed brand and maintain it well. Get original spare parts installed in the vehicle and avoid unnecessary wear and tear for a good resale value.

How to Calculate Car Depreciation Rate

You can use a car depreciation calculator to help you calculate your car’s present value after the applicable depreciation. Enter the car’s registration number, year of manufacture, make and model, etc., and instantly know the depreciation value.

To do this calculation manually, you can use the following formulas:

Using the Prime Cost Technique: Use this method to calculate the car’s depreciation as a set percentage of its total cost.

The cost of running the car X (number of days the car is owned ÷ 365) X (100% ÷ effective life in number of years)

Using the Diminishing Value Technique: Use this method to calculate the car’s depreciation value per year based on its base value.

The purchase value of the car X (number of days the car is owned ÷ 365) X (effective life in number of years ÷ 200%)

How to Reduce a Car’s Depreciation Rate

Using some measures, you can reduce your car’s depreciation rate and get a higher Insured Declared Value and resale value. These include

Better car maintenance A well-maintained car has a higher resale value and a better IDV. Get your car serviced on time from authorised service centres and maintain a record of the car’s servicing. Cars with available service history also tend to depreciate at a lower rate. Additionally, avoid modifications in your car as it may be difficult to sell a modified car and may reduce its resale value.

Buy a car with a higher resale value As stated earlier, luxury cars and cars from certain brands have a better resale value than others. Look at the resale value of a four-wheeler before purchasing it to avoid buying a vehicle with a high depreciation rate. Additionally, avoid buying a car model that may go obsolete in the near future.

Get a zero depreciation plan You can buy a zero depreciation add-on cover with your car insurance policy to claim the amount deducted as depreciation on the four-wheeler’s value.

Conclusion

The car depreciation rate differs based on its make and model. Several other factors affect the depreciation rate of your vehicle, like its age, maintenance, fuel efficiency, and previous ownership. Understanding the depreciation rate helps in buying the right car insurance policy. While only third-party car insurance is made mandatory by the government, it is always recommended to go for a comprehensive car insurance plan. These plans offer holistic coverage against own-damage as well as from third-party liabilities.

With Tata AIG, you will get the option to buy all types of car insurance policies and you can compare them before buying.

Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

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