The value of a car decreases over time due to age, wear and tear, and other factors. However, the rate at which the value of a car depreciates can vary significantly, depending on factors such as the make and model of the vehicle, its age, mileage and overall condition.
Car depreciation under income tax law
Under Section 32 of the Income Tax Act of 1961, depreciation refers to the decrease in the value of an object caused by wear and tear. Car depreciation refers to the difference between the value of a car between the time it was purchased and when it is sold.
See also: What is depreciation?
When does your car’s value start depreciating?
The Insurance Regulatory and Development Authority of India (IRDAI) sets the depreciation rates for cars used in insurance calculations across India. According to IRDAI guidelines, a one-year-old vehicle depreciates by 15%, while a five-year-old loses 50% of its original value. To provide a clearer picture, refer to the table below, which outlines the depreciation rate slabs mandated by IRDAI for all insurance companies. Here’s a detailed explanation of the depreciation rate for different car parts:
Depreciation rate for different car parts
| Depreciation of car’s plastic and rubber parts | 50% |
| Depreciation of car’s fibreglass parts | 30% |
| Depreciation of car’s metal parts | 0% – for first 6 months, from seventh month, the rate will depend on car’ age
5% – in the first year 10% – in the second year 15% – in the third year
|
| Depreciation on paint-related work | 50% |
| Depreciation on glass components | Nil |
Depreciation on commercial vehicles as per income tax
Under the Income Tax Act, commercial vehicles are subject to a depreciation rate of 30%. This means businesses can deduct 30% of the vehicle’s value from their taxable income each year, reflecting its declining value over time and providing significant tax savings for business owners.
How does car depreciation affect taxes?
If you have availed of a car loan, you may be eligible for tax benefits. Further, you can also get tax benefits on the depreciation of the car and save money. One way to claim a car loan tax benefit is to prove the car as a depreciating asset and consider this depreciation as an expense. One can claim depreciation on the car at 15% every year, which reduces one’s tax liability.
However, it is essential to note that you can claim depreciation by using a car for business purposes only. If you use your car 60% of the time for business and 40% for personal use, you can claim only 60% of the expenses, including interest and depreciation, as business expenses.
Can I claim car depreciation on my taxes?
Yes. Taxpayers can claim tax benefits on the depreciation of the car and other expenses.
Electric vehicle tax exemption
Section 80EEB of the Income Tax Act enables you to claim tax deductions of up to ₹1.5 lakh on the interest paid for a loan explicitly taken to purchase an electric car. Certain conditions and restrictions related to the lender and the electric vehicle must be met to qualify for this deduction.
It’s important to note that the loan must be sanctioned between January 1, 2019, and March 31, 2023, to be eligible for the tax benefits under Section 80EEB.
How to calculate the car depreciation rate?
The depreciation rate of a car in India can vary depending on a number of factors, such as the make and structure of the vehicle, its age, mileage, overall condition, and local market conditions. In general, newer cars with lower mileage tend to depreciate more slowly than older cars with higher mileage. However, other factors, such as the demand for the car’s make and model in the local market, can also affect its depreciation rate.
There are several ways to estimate the depreciation rate of a car in India. One method is to use a depreciation calculator, which can be found online or through a dealership or financial institution. These calculators use factors such as the car’s make and model, age, and mileage to estimate its value over time.
Another way to calculate car depreciation is to look at the prices of similar cars sold on the used car market. This can give you an idea of how much your vehicle will likely be worth as it ages.
Car and car parts depreciation rate in India
| Age of vehicle | Depreciation rate |
| 0-6 months old car | 5% |
| 6 months – 1-year-old car | 15% |
| 1 year – 2 years old car | 20% |
| 2 year – 3 years old car | 30% |
| 3 year – 4 years old car | 40% |
| 4 year – 5 years old car | 50% |
| Above 5 years | Decided by the insurer and the vehicle owner |
Does car depreciation per year affect car insurance premiums?
Yes, car depreciation directly affects the Insured Declared Value (IDV), impacting your insurance premium. The vehicle’s age, wear and tear, and overall lifespan determine the depreciation rate, reducing the car’s value over time. As the car depreciates, its IDV decreases, which can lower the premium but also affect the compensation you receive during a claim.
The Insurance Regulatory and Development Authority of India (IRDAI) has standardised car depreciation rates, ensuring uniformity across policies. Depreciation is applied differently to individual car components and spare parts, with each part assessed separately.
Why must you factor in car depreciation?
A new car depreciates in value the moment you drive it off the lot. This means the vehicle will be worth less than what you paid. It is important to understand car depreciation because it can affect your financial situation in several ways. For example, if you purchase a brand-new car and it depreciates quickly, you may end up owing more on the car than it is worth. This can be a problem if you need to sell the vehicle or trade it in before it has fully depreciated. On the other hand, if you buy a used car that has declined significantly, you may get a good deal and avoid some of the costs associated with car ownership.
Overall, understanding car depreciation is essential for anyone considering buying, owning, or selling a car. It can help you make informed decisions about buying and financing a vehicle and can help you avoid financial difficulties in the future.
Factors affecting car depreciation
Car make and model: Luxury and high-end cars depreciate faster than smaller, more common vehicles. This is primarily due to the higher costs of spare parts and maintenance associated with such vehicles.
Car age: The older the car, the higher its depreciation rate. Age also affects the vehicle’s physical condition, mileage, and overall market value.
Maintenance and repairs: A well-maintained car typically depreciates less. In contrast, a vehicle with multiple issues, whether with its body or interior, will experience faster depreciation.
Fuel efficiency: Cars with better fuel economy hold their resale value better and depreciate slower.
Previous owners: A car with fewer previous owners, or just one, generally has a higher resale value and lower depreciation.
Ways to minimise car depreciation
There are several ways to minimise car depreciation:
Buy a car with a good track record for holding its value: Some makes and models of vehicles are known for retaining their value better than others. Researching and choosing a car with a good track record for holding its value can help minimise depreciation.
Buy a used car: New cars tend to depreciate more quickly than used cars, so buying a used car can help minimise depreciation.
Maintain the car well: Regular maintenance and repairs can help keep a vehicle in good condition, which can help minimise depreciation.
Avoid excessive mileage: The more a car is driven, the more it will depreciate. Limiting mileage can help minimise depreciation.
Avoid accidents: Damage to a car due to accidents can significantly impact its value and increase its rate of depreciation.
Choose a car with good fuel efficiency: Cars with good fuel efficiency tend to hold their value better than those with poor fuel efficiency.
Sell or trade in the car before it has fully depreciated: If you sell or trade in a vehicle before it has fully depreciated, you might get a better price for it and minimise losses due to depreciation.
Do electric vehicles depreciate faster than normal vehicles?
Electric vehicles (EVs) tend to depreciate faster than traditional internal combustion engine (ICE) cars due to several key factors:
- Battery degradation: The battery is one of the most expensive components of an EV. Over time, batteries lose capacity, reducing the car’s range and performance. This degradation can cause significant value loss compared to traditional vehicles, where engines generally last longer without severe performance drops.
- Rapid technological advancements: EV technology is advancing rapidly. Newer models with longer ranges, better features, and faster charging capabilities are frequently released. This makes older EV models less appealing, leading to speedier depreciation as buyers prefer the latest technology.
- Lower demand for used EVs: The market is still developing. Many buyers hesitate to purchase used EVs due to concerns about battery life, charging infrastructure, and uncertainty about repair costs. This limited demand drives down the resale value of used electric cars more quickly than traditional cars.
- Incentive structures: Government incentives, such as tax rebates and subsidies, are often available for new EV purchases rather than for used EVs. This can make new EVs more attractive than used ones, further depressing the resale value of older EV models.
- Charging infrastructure: The availability and convenience of charging stations can affect the desirability of used EVs. In regions where charging infrastructure is limited or underdeveloped, buyers may be less willing to invest in a used EV, which negatively impacts its resale value.
- Uncertainty around long-term costs: Potential buyers may need clarification about long-term maintenance and repair costs, especially for EV-specific components like batteries and electric motors, leading to lower demand and faster depreciation than ICE vehicles.
How car depreciation rate affects car buyers and sellers
A car’s depreciation rate impacts both buyers and sellers in significant ways. Here’s how:
| Effect on buyers | Effect on sellers |
| Car buyers often look for the lowest price, but choosing a vehicle with a low depreciation rate is wiser. While this may cost more upfront, you’ll likely recover the difference when you sell the car.
Additionally, buying a second-hand car with a lower depreciation rate indicates the vehicle is well-maintained and reliable. Focusing on depreciation value is better than opting for the cheapest car available. |
Sellers can command a higher price for a well-maintained car with a low depreciation rate. To maximise resale value, choose a reputable brand, maintain the vehicle well, use original spare parts, and avoid unnecessary wear and tear. |
Housing.com POV
Understanding car depreciation is crucial for both buyers and sellers. It influences a car’s resale value, insurance premiums, and overall cost of ownership. Buyers can reduce financial loss by choosing vehicles with lower depreciation rates, maintaining them well, and considering factors like make, model, and mileage, while sellers can maximise returns. Staying informed about how depreciation works helps make more intelligent decisions in the long term, whether purchasing a new vehicle or planning to sell one.
FAQs
What is depreciation, and why is it an essential factor to consider when buying a car?
Depreciation is the gradual decrease in the value of a car as it ages. It is a key factor to consider when buying a car because it affects the car's overall cost.
How much does a car depreciate in value over time?
A car's value will depreciate by an average of 20-30% over the first four years and 10-15% annually after that.
What affects the value of a car?
A car's value is affected by various factors, including the vehicle's make, model, year, and condition.
How do I know if a car will retain its value?
Researching and choosing a car with a good track record for holding its value can help minimise depreciation.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
