Updated on: May 29th, 2023
14 min read
Purchasing a car or bike is a huge investment in your life. But at the same time, you have to understand that with time the car ages and its value depreciates. As soon as you bring your vehicle out of the showroom, the value depreciates by 5% and gradually keeps on falling with each passing year. This depreciation amount is generally considered when you buy or claim insurance for your car or bike.
Therefore, in this article, we will be guiding you in detail on how depreciation on your car or bike is calculated, as well as provide some examples.
When you buy a car or bike, its value diminishes slowly with time due to natural wear and tear. This phenomenon is known as depreciation. It is the reduced estimated value of a fixed asset within a financial year.
The depreciation rate applicable to these vehicles differs as per the years it is used. The total depreciation amount can be calculated with the help of a car or bike value calculator. The rate applicable to your vehicle will be as per the Income Tax Act and the Companies Act.
Depreciation rates on different tangible and intangible assets have changed since the financial year 2017-18. The maximum rate presently applicable on any asset is 40%.
Car depreciation rate as per Income Tax Act is based on its types. They are:
|Asset Class||Asset Type||Depreciation Rate|
|Plant and machinery||Motorcycle, scooter, motor car or bike used other than in a firm to run them on hire.||15%|
|Plant and machinery||Motorcycle, scooter, motor car or bike used other than in a company to run them on hire. The vehicle must be acquired after or on 23rd of August 2019 but before 1st of April 2020 and used before 1st of April 2020.||30%|
The bike depreciation rate as per Income Tax Act is also classified in the same way as above.
Under the Companies Act 2013, Part "C" of Schedule II, you will find the depreciation rates applicable to different assets.
Car depreciation rates as per the Companies Act are:
Companies Act 2013 also provides the depreciation rate applicable to motorbikes. These assets generally have a useful life of 10 years.
The bike depreciation rate applicable under the Companies Act is:
The age of your car or bike helps determine the applicable depreciation rate. Below is the car depreciation rate chart, discussing in detail all percentages applicable as per the life value of assets.
|Age of car||Depreciation rate to calculate Insured Declared Value (IDV)|
|< 6 months||5%|
|> 6 months but < 1 year||15%|
|> 1 year but < 2 years||20%|
|> 2 years but < 3 years||30%|
|> 3 years but < 4 years||40%|
|> 4 years but < 5 years||50%|
Bike depreciation rate chart is the same as the one for cars.
The value of your car or bike continues to decrease after five years, although being dependent on its condition and serviceability. After five years, your vehicle is generally considered obsolete. So, the rate of depreciation is applied accordingly.
For car depreciation rate after five years, the rate gets mutually decided by the insurance provider and owner. To calculate IDV, the car owner and insurance provider mutually decide on a specific range.
For the bike depreciation rate after five years, the applicable rate to calculate IDV is mutually decided by the policyholder and insurance provider in order to avoid discrepancies.
Zero depreciation in car insurance or nil depreciation cover is an add-on where the insurance company does not charge any depreciation for the insured car. The policyholder can claim the total cost of replacing any car parts for accidental damage. Moreover, the depreciation value for any damaged parts is not deducted before the amount is claimed.
By adding zero depreciation in your car insurance, you can claim several benefits such as:
Indian insurance companies on their official websites provide car depreciation or IDV calculators. This tool effectively computes your vehicle's depreciation, allowing you to evaluate its worth depending on different parameters. The IDV calculator instantly furnishes proper assessment based on your car's age, condition, and mileage.
This feature is useful when selling or insuring a used vehicle. Furthermore, using the tool is pretty simple. Just enter your vehicle's registration number, year of manufacture, brand, model, and city of residency to calculate the depreciation of your car.
To calculate the depreciation of your bike, you can use IDV calculators available on the websites of different insurance providers. The IDV of your bike is generally not calculated based on the price of the vehicle during purchase. This calculator considers its market value from the commencement of the policy. The value tends to vary significantly with time and usage.
The formula to calculate the depreciation of your car includes two different methods. They are as follows:
The formula to calculate the depreciation of your car using the diminishing value technique is:
Purchase value of car * (number of days car owned ÷ 365) * (effective life in years ÷ 200%)
Note: Here, depreciation is calculated considering the base value of the car.
Formula to calculate depreciation of your car using the prime cost technique is:
Cost of running the car * (number of days car owned ÷ 365) * (100% ÷ effective life in years)
Note: Here, depreciation is calculated as a particular percentage of the total cost.
To calculate the depreciation of your two-wheeler, you can use the following formula:
IDV (insured declared value) = [Current market value of your car - depreciation costs] + [accessories cost - depreciation value of accessories]
However if you do not have any accessories attached to the bike, the formula to calculate depreciation is:
IDV = Manufacturer’s registered cost of bike - Depreciation value
Note: It is important for you to appropriately understand the influence of depreciation percentage on your bike's age, to comprehend its IDV.
Suppose you purchased a car worth Rs.5,50,000. After two years, the current market value of the car is Rs.5,20,000. If you wish to calculate your IDV during this period, the depreciation rate applicable is 20%.
Therefore, the IDV of your car will be:
IDV@80% (on Rs.5,75,000) = Rs.4,16,000
Assume the market worth of your bike is Rs.5 lakh while purchasing the bike insurance policy. Here your insurer will reimburse the maximum amount you choose as an IDV if your bike suffers total damage or irreparable loss. It is critical to understand that you may only claim for the IDV if your bike gets stolen or severely damaged during the policy period.
The depreciation value of your car and bike highly depends on the brand, model and price. Using an online car or bike depreciation calculator accessible from several insurers will help you consider what worth your vehicle presently retains, depending on the current market pricing. Thus, whether you intend to sell a car or bike or get it insured, you must account for all depreciating factors.