In a place like India, buying a car is a dream come true for many. Owning a car gives you and your family the freedom to travel comfortably, safely, and on time without depending on public transport. With that being said when you buy a car, it is vital to be aware of its depreciation rate. The reason it is vital is because the depreciation rate of a car plays a major role in determining the market value of the car at any point in its life and understanding the car’s IDV (Insured Declared Value) set by the car insurance companies. Therefore, in this article we learn about car depreciation, how it is calculated, and the factors affecting car depreciation.
What does car depreciation mean?
You may have heard the phrase ‘Your car starts losing its value the second it comes out of the showroom.’ It is true and the decrease in a car’s value over time is called car depreciation. This is why in financial terms a car is often referred to as a depreciating asset The difference between the car’s original purchase price and its current market value is what constitutes depreciation.
Why does a car’s value depreciate?
Anything that is physically used usually loses its value over time, because with time it suffers wear and tear, and keeps on becoming less usable. Even if it is not used, it is assumed that the product has been used before, which in turn decreases its value. For example, if you buy a juicer for your kitchen, but do not use it for a couple of years, and then try to sell it, it will not have as much market value as a new one. In the same way, a car is something which is frequently used and consequently, its value depreciates. And even if it is not used, its value still depreciates with age.
What is the rate of car depreciation?
The rate of a car depreciation simply means the rate at which a car’s value reduces over time. While it is a popular belief that a car depreciates with every year of its age, it is not true. In reality, a car’s value depreciates with every passing moment of its life. On an average, every car depreciates more than 15 percent every year and however, if you want to know the actual depreciation rates, we have covered the method to calculate the rate of depreciation later in the article.
What are the factors affecting car depreciation?
While we have already studied that a car’s value depreciates with age, age is not the only factor impacting car depreciation. There are some other key aspects which affect a car’s depreciation rate. Let’s understand them one by one.
Wear and Tear
As a car is used, all its components such as the engine, tyres, brakes, and interiors suffer wear and tear, which declines its overall condition and performance. Moreover, scratches, dents, mechanical, and electrical issues also deteriorate a car’s value. Frequency of usage is also a key influential factor in a car’s depreciation. The more frequently a car is used, the faster it depreciates.
Brand Value
The Indian car market has several car brands and some of these brands are acclaimed for the dependability of their cars. Cars from manufacturers like Maruti Suzuki, Toyota, Honda, and Hyundai come with an invaluable trust factor. They usually are less likely to suffer any faults and are highly reliable. Thus, such cars suffer from less depreciation than similarly aged cars from other brands. Meanwhile, as far as Maruti Suzuki, Toyota, Honda, and Hyundai are concerned, what also helps slow the depreciation rate is the fact that these cars have lower maintenance costs as compared to other cars.
Odometer reading
When it comes to car depreciation, the odometer reading is one of the most impactful factors. It is simple though: the higher the odometer reading, the more the car depreciates. All the same, there are some cars that hold their value longer than others despite high odometer readings, for example, Toyota Innova and Honda City.
Number of owners
The condition of a used car is directly linked to the way it has been treated by its owner and since everyone treats their car in their own way, it becomes difficult to conceive the life of a car which has been sold multiple times. A car’s value depreciates by a considerable margin every time it gets traded, and this is why the more the ownership changes the lesser the car’s market value.
Maintenance
A car that has been well maintained depreciates at a slower rate than the one which has not. To maintain a car properly, one should follow the service schedule mentioned in the user manual of the car. Moreover, one should get their car serviced at the authorised service centres only and keep all the service records. A buyer in the used car market will be willing to pay more for a well-maintained car with complete service records.
Economic & Regulatory Changes
Amendments in emission norms and changes in fuel prices and taxes considerably impact a car’s depreciation. For example, because currently, the Bharat Stage VI emission norms are in force, BSVI cars in the used car market hold more value than BS-IV cars. Moreover, in the not-so-distant future, stricter emission norms on diesel-powered cars may decrease their demand, causing them to depreciate faster.
Market trends and demand
A car’s depreciation rate is inversely proportional to its demand in the market. The higher the demand the slower the depreciation rate. For example, today SUVs are the mass-favorite and because of this, cars of other body types such as hatchbacks, sedans, and MUVs are depreciating relatively faster.
How to calculate your car’s depreciation?
The Insurance Regulatory and Development Authority of India (IRDAI) has fixed a general rule for the car depreciation rate, which is used for insurance purposes. According to the current guidelines, a car loses approximately 15 percent of its value in the first year, whereas a five-year-old car can depreciate up to 50 % of its original value. Here is a table highlighting the fixed depreciation rate slabs set by IRDAI.
Age of the car | Depreciation rate |
Up to six months | 5 percent |
Six months to one year | 15 percent |
One year to two years | 20 percent |
Two years to three years | 30 percent |
Three years to four years | 40 percent |
Four years to five years | 50 percent |
Car Depreciation Under the Income Tax Act
Car depreciation under the Income Tax Act, 1961, helps the taxpayers claim depreciation as an expense and reduces their taxable income (taxable income=revenue-expense). According to the Income Tax Act, 1961 a motor vehicle’s written down value (WDV) depreciates by 15 percent every year. Here, the car’s depreciation is evaluated based on the written down value (WDV) of the car, which means that depreciation is applied to the reduced car’s value after adjusting for the depreciation claimed in the previous year.
Now, if you want to calculate a car’s depreciation, you can do it in two ways: According to IRDAI or the Income Tax Act.
According to IRDAI
To calculate a car’s current monetary value, take the original ex-showroom price and from it, subtract the depreciated value based on the car’s age.
For example, if your car’s original ex-showroom price was Rs. 10 lakh and now, it is 3 years old, then according to IRDAI’s depreciation slabs, the depreciation rate would be 40% of the vehicle’s cost.
Initial cost = Rs. 10 lakh
Depreciation rate (for slab 3 to 4 years) = 40% of Rs. 10 lakhs = Rs. 4 lakh
Current value = Rs. 10 lakh – Rs. 4 lakhs = Rs. 6 lakhs
According to the Income Tax Act
To calculate a car’s depreciation rate this way, reduce 15% value from the written down value (WDV) for every year.
For example,
Car’s monetary value at the end of the first year: Rs. 10,00,000 – Rs. 1,50,000 (15% of Rs 10 lakh) = Rs. 8,50,000.
Car’s monetary value at the end of the second year: Rs. 8,50,000 – Rs. 1,27,500 (15% of Rs 8.5 lakh) = Rs. 7,22,500.
Car’s monetary value at the end of the third year: Rs. 7,22,500 – Rs. 1,08,375 (15% of Rs 7.2 lakh) = Rs. 6,14,125 and so on.
Summary
Car depreciation is a vital point to consider for both buyers and sellers of cars, and understanding its impact is imperative for you to make an informed decision. For example, for a buyer, car depreciation impacts the affordability of the vehicle, whereas, for sellers, car depreciation should be taken into account while pricing their vehicles. In this article, we learn everything about car depreciation, the factors affecting car depreciation, and how to calculate it.
FAQs
What is car depreciation?
The process of reduction in the monetary value of a car as it ages and is used is called car depreciation.
What is the rate of car depreciation?
The rate of a car’s depreciation simply means the rate at which a car’s value reduces over time.
Can car depreciation impact income tax?
Yes, depreciation can be claimed as an expense, hence it can reduce taxable income.
Can a car’s value increase over time?
Yes, if the demand for a particular car is high and its supply is low, the car may appreciate its value instead of depreciating. This usually happens when the demand for a car increases after its production stops.
