Dec 23, 2022
Car Depreciation Explained – How to Calculate and Minimise Depreciation
Buying a new car is a dream for many. Owning one gives a sense of accomplishment and freedom; the freedom to no longer rely upon public transport for your travel needs. Be it for a daily commute to work or those weekend trips with your loved ones. And along with selecting a suitable car based on your requirements, an important consideration to keep in mind is car insurance.
Car insurance is a mandatory requirement by the Motor Vehicles Act of 1988. As a vehicle owner, you need to comply with this requirement, failing which can attract hefty penalties. Thus, a third-party car insurance policy is the minimum stipulated insurance cover. But that may not always be sufficient for every situation. Hence, you can consider opting for a comprehensive policy. While the car insurance prices may be higher than that of a third-party cover, it offers broader coverage to protect against damages to your vehicle. * Check out the car insurance premium calculator by Bajaj Allianz General Insurance.
And while there are several factors to look for when comparing car insurance plans, it is vital to understand depreciation and its impact. This article elaborates on depreciation to help you get a clear understanding of what impacts your car’s value.
What is depreciation?
Depreciation is the reduction in the value of the asset due to the passage of time. Time isn’t the only factor that impacts depreciation, but also its use. Thus, usage and time together result in depreciation.
To simplify the concept of depreciation, it is the difference in price at the time of selling your car since it was purchased. Routine wear and tear resulting in depreciation not just impacts the selling price of your car, but also the Insured Declared Value or IDV.
Does depreciation impact your car insurance premium?
As discussed above, the depreciation on your car has an impact on the Insured Declared Value. The age of the vehicle, its wear, and tear due to routine use, and its useful life are what determine the overall depreciation rate. The impact of depreciation on your car insurance prices lowers the compensation that is paid by the insurer for a claim. The components that require replacement are depreciated based on their age, and thus, a lower compensation is paid.
*Standard T&C Apply
Are there any standardized rates of depreciation specified by the IRDAI?
Yes, the Insurance Regulatory and Development Authority of India (IRDAI) has laid down standardized car depreciation percentage for individual spares. You can visit the official website of IRDAI for further details. Hence, you may receive different amounts of compensation for every spare.
Here are some spares for which depreciation rates are mentioned:
- Rubber, nylon, and plastic spares have a depreciation rate of 50%
- Depreciation for the battery of the vehicle is set at 50%
- Fiberglass components have a depreciation rate of 30%
*Standard T&C Apply
For all other components, the depreciation is calculated based on the IDV of the vehicle, which is mentioned below:
| Age of the car |
The depreciation rate for determining the IDV |
| Not more than 6 months |
5% |
| Greater than 6 months but not more than 1 year |
15% |
| Greater than 1 year but not more than 2 years |
20% |
| Greater than 2 years but not more than 3 years |
30% |
| Greater than 3 years but not more than 4 years |
40% |
| Greater than 4 years but not more than 5 years |
50% |
*Standard T&C Apply
For cars that are either older than five years or discontinued by the manufacturer, the IDV is determined mutually by the insurance company and you, the policyholder. A car insurance premium calculator can be used to get an estimate of the premium of the policy after considering the applicable depreciation rates.
How to compute the depreciation for your car?
Insurance companies, generally, provide a car value depreciation calculator or an IDV calculator in India. This helps to compute the vehicle’s depreciation rate and determine the true value of your car. This tool is easy to use, where details such as manufacturer, model and make of your car, the registration details, and more, help to get an estimate of your vehicle.
While the IDV calculator is one way to know the depreciation of your car, you can also compute it using the following formulas:
1. By way of the Prime Cost Technique
This method presents depreciation as a set percentage of its total cost.
The formula:
The cost of running the car X (number of days the car is owned ÷ 365)
X (100% ÷ effective life in a number of years)
2. By way of the Diminishing Value Technique
This method presents depreciation using the car’s base value.
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%)
*Standard T&C Apply
With these formulas, you can arrive at the car’s depreciation percentage, which helps you appropriately price the car when selling or buying a used vehicle.
Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.
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