Depreciation reduces the market value of a car over time. It also directly impacts its insurance and resale value. The depreciation value is calculated using IRDAI’s standard age-based rates. It applies to both the car and its accessories. Factors such as mileage, condition, and market demand also affect this value. Knowing the Insured Declared Value (IDV) and using a car insurance depreciation calculator will help calculate better coverage.
Introduction
Car depreciation isn’t just an accounting term you can skip knowing about. It is something every vehicle owner should understand, especially when selecting the right car insurance plan. The value of your car decreases as it ages. This drop affects the amount you pay for insurance and the amount you will receive if your vehicle is damaged or written off. Using a car insurance depreciation calculator can provide a clearer picture of your car’s current value and help you plan accordingly.
Why Knowing About Depreciation Matters
The price of your car starts to fall from the day you drive it out of the dealership. However, what many people don’t realise is that the declining value, known as depreciation, plays a significant role in how insurers calculate your premiums and claims. The payout from your insurer when your car gets stolen or badly damaged is based on its current value—it is not based on what you paid for it initially. And that is where depreciation comes in.
Standard Depreciation Rates
In India, insurers follow guidelines from the Insurance Regulatory and Development Authority of India (IRDAI) while calculating depreciation. These are standard rates applied to your car based on its age. Let us understand what the rates are like:
| Age of Vehicle | Depreciation Rate (%) |
| Up to 6 months | 5 |
| 6 months to 1 year | 15 |
| 1-2 years | 20 |
| 2-3 years | 30 |
| 3-4 years | 40 |
| 4-5 years | 50 |
| Over 5 years | Negotiable, based on IDV |
These rates apply to the car’s ex-showroom price, excluding registration and taxes. For cars over five years old, the insurer typically calculates the IDV based on market trends and a mutual agreement with the policyholder.
Depreciation on Car Parts During Insurance Claims
Insurers don’t always cover the full cost when you file a claim for repairs or replacement for damages suffered during covered events. They apply part-wise depreciation, especially on components like rubber, plastic, and fibre parts. Here is a rough idea of the rates:
- Rubber or plastic parts: 50% depreciation
- Fibreglass parts: 30%
- Metal parts: Based on car age (ranges from 0% to 50%)
- Glass parts: No depreciation applied
This means you may not receive full coverage even if your car is insured, unless you have a zero depreciation add-on.
How to Calculate IDV
IDV is the estimated market value of your car at any given time. It is the amount your insurer will pay in the event that your car is stolen or completely damaged beyond repair. Insurers calculate the IDV when you first buy the policy and update it at every renewal. This also depends on the age and condition of the car.
Here is a simple formula to understand how IDV is worked out:
IDV = Ex-showroom price – Depreciation (based on vehicle age) + Value of accessories – Depreciation on accessories
Example:
You bought a car for an ex-showroom price of ₹10 lakh. The applicable depreciation rate after three years, as per IRDAI guidelines, is 40%. That means —
- Base depreciation = ₹10,00,000 × 40% = ₹4,00,000
- IDV = ₹10,00,000 – ₹4,00,000 = ₹6,00,000
Now, let’s suppose you have added accessories, such as a touchscreen infotainment system worth ₹50,000. Accessories are also subject to depreciation, typically at a rate of 50% if they are not factory-fitted.
- Accessories depreciation = ₹50,000 × 50% = ₹25,000
- Depreciated accessory value = ₹25,000
- Final IDV = ₹6,00,000 (base) + ₹25,000 (accessories) = ₹6,25,000
So, in this case, your car’s total IDV would be ₹6.25 lakh.
Factors That Affect Car Depreciation
While IRDAI sets standard depreciation rates, several other factors affect the actual market value of your car. These are:
- Brand and model: Premium or luxury cars tend to depreciate faster due to high maintenance costs and rapidly advancing technology. On the other hand, reliable models from mass-market brands may retain value better.
- Odometre: A car with a higher odometer reading typically sees faster depreciation, since it indicates more usage and wear on engine parts.
- Service history: Cars that are regularly serviced, with proper records, tend to hold value better and may fetch higher resale prices.
- Condition of the Vehicle: Scratches, dents, faded paint, and interior damage can significantly reduce the value of your car, both in resale and insurance assessment.
- Market demand: Some models lose value quickly because they are discontinued or fall out of favour in the used car market.
Zero Depreciation Cover: A Smart Add-On
You need to consider purchasing a zero-depreciation add-on if you want to avoid depreciation deductions during claims. This cover ensures that no depreciation is subtracted when parts are replaced. The insurer pays the full cost of repairs, excluding a compulsory deductible or consumables.
This add-on is ideal for:
- New cars (up to 5 years old)
- Cars used daily or in high-traffic areas
- Owners who want maximum claim benefit
Keep in mind that this add-on slightly increases your premium, but it is worth it.
How Depreciation Affects Resale
The depreciation value essentially decides your selling price when selling a used car. Buyers check the age, mileage, condition, and service history, all of which reflect how much the vehicle has depreciated. Maintaining a low-depreciation profile through careful driving, timely servicing, and proper documentation is suggested. This will help you secure a better deal if you plan to sell your car a few years after buying it.
Conclusion
Depreciation significantly impacts the value of your car as it ages. It also directly affects your insurance coverage. The drop in value can influence how much you actually receive when you file a claim. Understanding this is important when you choose or renew a car insurance plan.
IDV determines your premium as well as the payout in case of total loss or theft. If the IDV is too low, you risk being underinsured. And if it is too high, you might overpay on premiums. That is where a car insurance depreciation calculator becomes useful—it helps you get a realistic estimate of your car’s worth based on its age, condition, and depreciation rate.
Disclaimer: The above information is for illustrative purposes only. For more details, please refer to the policy wordings and prospectus before concluding the sales.
Follow our WhatsApp channel
