Schmidt decomposition is a widely employed tool of quantum theory which plays a key role for distinguishable particles in scenarios such as entanglement characterization, theory of measurement and state purification. Yet, its formulation for identical particles remains controversial, jeopardizing its application to analyze general many-body quantum systems. Here we prove, using a newly developed approach, a universal Schmidt decomposition which allows faithful quantification of the physical entanglement due to the identity of particles. We find that it is affected by single-particle measurement localization and state overlap. We study paradigmatic two-particle systems where identical qubits and qutrits are located in the same place or in separated places. For the case of two qutrits in the same place, we show that their entanglement behavior, whose physical interpretation is given, differs from that obtained before by different methods. Our results are generalizable to multiparticle systems and open the way for further developments in quantum information processing exploiting particle identity as a resource.