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Development trend in diesel engines is to downsize and develop more power from same size of engine. This requires additional air flow and hence increased boost pressure ratio (BPR). With increased brake mean effective pressure (BMEP), the altitude capability of engine reduces. This paper presents a novel approach to estimate the altitude capability of engine and calculate deration factor. As the altitude above sea level increases, ambient pressure decreases, air becomes thinner. For same altitude, ambient temperature also varies as per seasonal changes. This results in change (reduction) in ambient air density. This reduction has significant effect on turbocharger (TC), Intercooler and engine performance. Beyond a limiting altitude, engine performance shall be compromised to avoid any damage to engine and its components.