The depreciation rate for vehicles plays a crucial role in the financial implications of car ownership. As a critical aspect of the Income Tax Act of 1961, depreciation reflects the decline in a car's value due to wear and tear. This influences various financial considerations regarding maintaining a vehicle. It illustrates the decrease in a car's value from its acquisition to its eventual sale.
In this blog, we will look into the details regarding the depreciation rate of four-wheelers, which will help you understand the value of your car and make the best decision related to its repairs and resale.
When Does Your Car's Value Start Depreciating?
A car's value depreciates when it is driven off the showroom floor. The depreciation rate is high in the early years, with a stabilisation seen in later years.
In India, the Insurance Regulatory and Development Authority of India (IRDAI) has recognised standard depreciation rates for insurance purposes.
The depreciation rates according to the age of the vehicle are.
- Up to 6 months: 5%
- 6 months to 1 year: 15%
- 1 year to 2 years: 20%
- 2 years to 3 years: 30%
- 3 years to 4 years: 40%
- 4 years to 5 years: 50%
These rates are utilised to calculate the Insured Declared Value (IDV) of a vehicle, which determines the compensation amount in case of theft or total loss.
What Factors Affect a Vehicle's Value Over Time?
Several factors influence how a car's value depreciates:
- Brand Reputation: Vehicles from established manufacturers, such as Honda, Toyota, Maruti Suzuki, and Hyundai, tend to retain value better due to consumer trust in the brand name.
- Mileage: Higher odometer readings generally lead to lower resale values. However, cars from reputable brands may maintain value despite higher mileage, reflecting their durability.
- Maintenance History: Regular servicing and proper maintenance enhance a car's lifespan and resale value. Vehicles with documented service records and extended warranties are more appealing to buyers.
- Fuel Efficiency: Cars with higher fuel efficiency are more desirable in the used car market, as they promise lower running costs for future owners.
- Market Demand: Popular models with high demand tend to depreciate slower compared to less sought-after vehicles.
- Condition and Appearance: Well-maintained cars with minimal wear and tear, both mechanically and aesthetically, hold their value better.
- Age of the Vehicle: Older cars generally depreciate more, but the rate can vary based on the factors mentioned above.
- Model Updates: The introduction of newer models or facelifts can accelerate the depreciation of older versions.
- Economic Factors: Changes in economic conditions, fuel prices, and government policies can influence car depreciation rates.
- Technological Obsolescence: Rapid advancements in car-related- technology can make older models less desirable for buyers, affecting their resale value.
How Does the Rate of Car Depreciation Affect You?
Understanding car depreciation is vital for both current owners and those planning to buy a pre-owned vehicle:
- For Owners: Being aware of depreciation helps you plan the best time to sell the car for optimal financial gains. It also helps in proper maintenance and usage of the four-wheeler to protect its resale value. We can also claim car loan tax benefits by presenting the car as a depreciating asset, with a 15% depreciation annually to curtail tax liability.
- For Buyers: Knowing depreciation rates helps in making cost-effective purchasing decisions. Choosing brands and models known for retaining resale value can result in better long-term investments.
Additionally, depreciation impacts car insurance premiums and claims. A lower car value can reduce premium costs, but it also means a lower payout in case of total loss.
How to Calculate the Rate of Depreciation of Your Car?
Utilising online calculators or scrutinising similar used cars' prices for estimates, you can get a rough idea of your vehicle’s depreciation rate.
Another way to calculate the depreciation is by multiplying the total cost of the car by a percentage that decreases every other year. This is done by keeping the steep depreciation rate of new four-wheelers in mind, which slowly stabilises once the vehicle has been used for some time.
Conclusion
Understanding the car depreciation rate is imperative for making informed financial decisions concerning car ownership. Whether integrating it into tax benefits, evaluating car insurance requirements, or contemplating resale value, a nuanced comprehension of how depreciation shapes a car's value over time is vital for maintaining financial equilibrium in vehicle ownership.
Disclaimer: The information provided in this blog is for educational and informational purposes only. It may contain outdated data and information regarding the topic featured in the article. It is advised to verify the currency and relevance of the data and information before taking any major steps. ICICI Lombard is not liable for any inaccuracies or consequences resulting from the use of this outdated information.