My dad and I decided to gift my mom a car for her birthday. My dad has been driving for decades, but mom has never been so confident about it. Hence, we ended up with the idea of buying a pre-owned vehicle for her which can help her in honing the skills. We visited a certified reseller and explained to him our needs. He suggested a refurbished Maruti Suzuki Alto which is one of the most fuel-efficient cars in the market. The interior, body and wheels were in good condition. After a test drive, we finalized the car.
The reseller informed us that we have to buy an insurance policy ourselves as they do not provide that service. Hence, we completed all other formalities including the payment and informed the reseller that we will provide him with a copy of the car insurance before the delivery. To get the best IDV it was essential to calculate the depreciation accurately.
Here is the brief introduction about depreciation, if you are interested:
Well, the general definition of car depreciation is the reduction in its value with time. It means that the value of a car keeps reducing with time. Mostly, the value of a car is reduced to 50% of its initial value in the first three years of purchase, sad but true.
With further time, the depreciation rate decreases gradually. Most of the people prefer to purchase a car at a depreciated rate as it is much less than the actual rate of the car.
Now, if we talk about the factors. There are many of them that can lead to depreciation of a car. Here are some of them:
So Anything that was bought for X will soon reach a value of X-Y because of wear and tear. But I did not know the exact math behind it. My dad’s friend is an employee of a reputed insurance company and we decided to pay him a visit. On providing him with the necessary details he explained to us that Car IDV stands for insured declared value which is the money an insurer will be ready to pay you if you have a policy covering your car. It is calculated using a simple formula:
IDV = (Selling Price of the Car – Depreciation) + (Accessories – Depreciation)
Selling price in the formula means the price at which the car was sold by the manufacturer. And the percentage of depreciation on cars has been fixed by the Insurance Regulatory and Development Authority. For explaining the calculation, he provided us with an informative table.
|Age||Depreciation Percentage (On Selling Price)|
|X < 6 months||5%|
|6 months > X< 1 year||15%|
|1 year > X < 2 years||20%|
|2 years >X < 3 years||30%|
|3 years > X < 4 years||40%|
|4 years > X < 5 years||50%|
X denotes the actual age of the car.
Uncle explained to us that people are mostly confused about deciding the value of accessories. Individuals often calculate the depreciation on car accessories that are included with the base model e.g. Car AC which is not correct. The thumb-rule is – if you did not pay extra for it, you don’t have to calculate the depreciation on it. When a car has reached an age of more than 5 years, the IDV is calculated by mutual agreement of the insurance buyer and seller. He also provided us with the values for calculating depreciation on accessories and other parts.
|Material||Depreciation Percentage (On Selling Price)|
|Nylon, Plastic, Rubber, Tubes & Tyres, Batteries, Airbags||50%|
|Age||Depreciation Percentage (On Selling Price)|
|X < 6 months||0%|
|6 months > X < 1 year||5%|
|1 year > X < 2 years||10%|
|2 years > X < 3 years||15%|
|3 years > X < 4 years||25%|
|4 years > X < 5 years||35%|
|5 years > X < 10 years||40%|
|10 years > X||50%|
X denotes the actual age of the car.
Uncle made it very clear that the condition of the car, popularity of the model, reliability of the brand, and several other factors play a major role in the valuation of the car. Hence, a car serviced at a professional car repair place can help you in getting the best IDV.
We bought the insurance and gifted the car to my mom. Now with the best IDV and third party cover. We are assured about the investment in the insurance policy and mom is happy with her Alto. After this experience, I strongly recommend everyone to calculate the depreciation accurately when selling your car, buying a pre-owned car, or when renewing your car insurance.
Via an amendment to the Income Tax Rules, 1962 named Income Tax (9th Amendment) Rules, 2019, the Central Board of Direct Taxes has announced an increase in the depreciation rate of 30% and 45%.
The modified rates came into effect from 23rd August 2019, although it was issued and executed on 20th September 2019. Furthermore, all the cars purchased between 23rd August 2018 and 31st March 2020 will come under the ambit of the new amendment.
Since there are two different rates of depreciation implemented by the new amendment, a separate segment of motor vehicles are covered by each rate. The 30% depreciation rate applies on all the cars, but those used in a car hire business will get a 30% depreciation rate.
For the second part of the rate, the cars, lorries, and buses bought by the owner and given for hire will invite a 45% depreciation rate. Not only these motor vehicles must be acquired between the specified time period, but they must also be put to use before the designated date.
The new depreciation rates keep the used-vehicle market in good stead. Alongside this, it will also pump up the new car sales as the owners will be inspired to change the cars sooner for the fear of losing their value relatively quickly than before.
In another instance, this legislation will also lower the motor vehicle insurance premiums for the second year and every succeeding year henceforth. Plus, the businesses which run a car hire business will become eligible to claim higher tax benefits because their initial expenditure will be more than previous years.
Moreover, the 30% depreciation rate will convince the regular and corporate car owners to buy the BS-4 vehicles. More importantly, the fleets of cars owned by several companies will want to switch the new cars with the old ones.
Consequently, the old cars will be put up for sale, which will bring more business for the used car industry.
Here’s a scenario to help you understand why the higher depreciation rates will pump the resale market and prompt the people to buy new cars.
Assume that you had a car 10 years ago bought for Rs. 5 Lakh. Next, you decided to sell the car after 6 years according to the depreciation rates applicable before the amendment (see table above). According to the table, the car’s value will depreciate by 40% which means the resale value will drop down to between Rs. 2.5 Lakh to Rs. 3 Lakh.
Still, you have a great opportunity to sell it and buy a new one after 6 years. Now according to the present rates, the car’s resale value will drop down to between Rs. 3 Lakh to Rs. 3.5 Lakh after just one year.
This sudden drop in the resale value will motivate you to sell the car earlier than planned and buy a new one instead.
Actually, the depreciation rate varies based on the age of the car. For example, if the age of your car is more than 6 months and less than 2 years, the depreciation rate will be between 5-20%. If the age of your car is above 2 years and below years, the rate will vary between 30-50%. Knowing the depreciation is imperative if If you are planning on buying a new car for yourself.
If we talk about the maths behind depreciation, there are many things to consider. All the essential factors like the current market value of the car, depreciation on the accessories of the car, and material are considered. The depreciation is never calculated on the value of the car when someone purchased it. But, the current value of the car is considered, and that is calculated based on the time. It is reflected in the answer above.
The car depreciation rates vary based on the time of use and selling price. If the car is less than 6 months old, the depreciation rate will be 5%. On the other hand, if it above 6 months and less than 3 years, the rate will be 15-30%. Lastly, if the car is older than 3 years and less than 5 years, the rate will vary between 40-50%.
Keeping the car depreciation rates and time slab in mind, we can assume that the car depreciation cycle for a period of 5 years. Although, if the situation of the car is good, the depreciation period can also go up to 7 years. In such a case, the insured sum of a car is mutually decided by both the insurer and the insured person.
The formula for the car depreciation involves variables like the original value of a car, rate of depreciation, and the time of use. Make sure that when you get the value of your car calculated, all these factors are accurately measured. Mathematically, the formula is expressed as: Depreciation = Original value * (1 – Depreciation Rate/100)number of years