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.This study presents the effect of change in ambient temperature and pressure on engine, Intercooler and TC performance parameters such as AFR, Power, turbocharger speed, Compressor outlet temperature, Compressor Efficiency etc.This paper presents a scientific theoretical approach to calculate the deration factor for a Turbocharged after cooled engine as a function of ambient temperature and ambient pressure by taking into account the designed limiting boundary conditions of a TC, Intercooler and engine components.This paper also studies the effect of emission reduction strategies on change in deration factor.This paper also compares the deration factor for engines with different levels of boost pressure ratios i.e. the effect of change in engine BMEP and BPR on the altitude capability of engine.