Solar power is being promoted in corporates and private sector by Govt of India through Tax relief by allowing them to avail higher rate of depreciation more often termed as accelerated depreciation / AD Benefit, under section 32 of Income Tax act.
Accelerated depreciation is only a method of depreciation used for accounting or income tax purposes that enable greater deductions in the early stage of solar power asset. By increasing the deductions taken during the first few years, one can lower the overall income tax burden, thus making the decision for investing in solar more attractive.
The normal depreciation rate for any general plant and machinery is 15%.
Scenario uptil 31st march 2017
As per section-32 of Income Tax Act 1961, schedule entry 8(xiii), the Government of India (GoI) had till 31st march 2017 allowed to claim maximum up to 80% depreciation in first year of commissioning of solar power plant. Also as per Section 32 (1) (ii A)of Income Tax Ac 1961, an additional depreciation of 20% of actual cost can be claimed if new plant and machinery is installed for purpose of manufacturing. Hence, one could claim 100% depreciation for a solar power project, if the asset is in use for more than 180 days of the fiscal year. If the solar power plant is commissioned for a period of less than 180 days, then the depreciation benefit is split over two financial years. This applied to projects commissioned in fiscal year 2016-17 or earlier.
Scenario after 31st march 2017
However, as per the Union Budget in Feb 2016, the higher rate of depreciation under section 32 has been capped at 40% which is half of the existing depreciation rate. It is effective from 1st April 2017.
Hence considering the new budget policy, all solar power plants commissioned after 1 April 2017 will be eligible for following benefits :
- Solar plant commissioned for more than 180 days in a financial year :- It will be eligible for 40 + 20 % depreciation . Hence the asset owner can claim 60% depreciation in first year. This itself is a very big benefit as it incentivizes investment in solar power systems.
- Solar power plant commissioned for less than 180 days in a financial year will be eligible for half of full year depreciation rate given above. Hence in percentage terms a solar asset owner can claim 30% depreciation (60% / 2).
Given below is an illustration showing the payback and IRR in both scenarios considering the project is commissioned for more than 180 days in a year.
General assumptions :-
|1||Cost of solar system||Rs. 1,00,00,000/-|
|2||Electricity tariff (Landed inclusive of ED & Cess)||Rs. 6.50/ KWh|
|3||Estimated solar energy generation in first year||275650 KWh|
|4||Debt Equity ratio *||30% equity
|5||Interest rate||9.75% per annum|
* Based on general project finance norms of banks /FIs
Computation of ROI (Return on investment)
|S.N.||Particulars||As per AD policy from Apr 2017 onwards||As per old AD policy prior to Apr 2017 onwards|
|1||Depreciation Rate (%)||60 %||100 %|
|2||Depreciation amount (Rs.)||Rs. 60 Lacs||Rs. 100 Lacs|
|3||Tax saved on above amount||Rs. 20.40 Lacs||Rs. 34 Lacs|
|4||Hence, Net investment||Rs. 79.60 Lacs||Rs. 66 Lacs|
|4||Equity IRR||46.3%||55.5 %|
Considering the above present day scenario, Typically a solar system would have an ROI of 45% or higher and a payback of about 3 to 4 years.
Most important point to bear in mind that a Good quality and high reliability solar system has a life of more than 25 years.
Hence from a long term perspective, the solar investment continues to remain a very attractive investment decision for profit making entities which have income tax liabilities !