Accelerated Depreciation Tax Benefit For Commercial And Industrial Solar Power in India
For commercial and industrial users of electricity, the tax incentives offered on solar power plant by the Government of India are quite attractive, and make adoption of solar power a thriving and sustainable reality. To encourage the adoption of solar power by commercial and industrial users, GoI offers accelerated depreciation of capital assets associated with solar power plant. The current rate of acceleration which can be claimed in a year is 40%.
Insolergy has successfully completed commercial solar panel installation for entities across India, enabling them to claim the income tax benefit in form of accelerated depreciation.
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Accelerated Depreciation for Commercial and Industrial Users of Solar Power in India
A solar power system’s value decreases over time due to the wear & tear of parts and reduction in efficiency of solar panels. The accelerated depreciation benefit allows the commercial and industrial users of solar power to depreciate the assets built as Solar Power Plant at a much higher rate than general capital assets. This allows the user to then claim tax benefit on the value depreciated in a given year.
The following example further illustrates the point –
Let’s say a commercial or industrial user, ABC Pvt. Ltd., falls under an income tax bracket of 30%. Now suppose this user builds a general asset that is valued at Rs. 1.0 Crore in a given financial year, with an expected asset life of 20 yrs. Under normal circumstances, the user will be able to claim an annual depreciation of 5% of Rs. 1.0 Crore (considering linear depreciation, 100%/20yr = 5%/yr). for purpose of income tax.
This means the user will be able to claim tax benefit of 30% of 5% of Rs. 1.0 Crore per year = Rs. 1.5 Lakh per year for next 20 years.
However, in case of same investment made in a Solar Plant, the user is allowed to depreciate the asset at 40%, thus allowing the user to completely depreciate the asset within three years term, and saving a tax of Rs. 12 Lakh, Rs. 12 Lakh and Rs. 6 Lakh in the first, second and third year of operation respectively.
For anyone who appreciates time and value of money, the proposition of saving Rs. 30 lakh in taxes within only the first three years of installing the PV system is lucrative compared to saving the same amount over a period of twenty years. Thus the project IRR (internal rate of return) increases by the virtue of accelerated depreciation.
Is this the right time for commercial and industrial users to invest in Solar Power in India?
The rate of accelerated depreciation on solar power plants has been reduced from 80% in FY16-17, to 40% in FY16-17 onwards. This has been treated as a positive indicator for the industry, considering the prices of solar have fallen considerably since past 4-5 years, making the solar projects in India viable even without such incentives.
Industrial Solar Power User: The typical recovery period of an investment in a solar power plant for an Industrial Consumer with an average tariff of Rs. 8.0/unit is 4.50 years, even without the accelerated depreciation benefit.
Commercial Solar Power User: The recovery period of investment made in solar power plant for a commercial consumer with average tariff of Rs. 12.0/unit is less than 3.0 years, without accelerated depreciation benefit.
For the two cases described above, the accelerated depreciation now acts as a cherry on the top.
For anyone considering whether it is right time to invest in solar or not, one has to come back to the concept of time value of money. Commercial solar power projects are not only long-term investments but also provide reliable, increasing returns. The calculator on Insolergy’s website can help you evaluate parameters of your solar PV system such as the expected ROI and IRR after installing the solar PV system. In order to know more about how solar power can help you, get in touch with Insolergy.
About Insolergy Technologies
Insolergy is a comprehensive EPC solar solutions provider in India. The company provides Turnkey Solar Solutions, Project Management Consultancy, Engineering Consultancy, Operations & Management and Solar finance facilitation for solar power plants in India. The company has offices in Pune and Mumbai.
Insolergy client portfolio for project management consulting includes both State Operated and Private Infrastructure Developers in field of Transport and Hydro Power, large Trusts, etc.
Reference for current rate of acceleration: https://www.incometaxindia.gov.in/charts%20%20tables/depreciation%20rates.htm