Accelerated depreciation benefits on Solar Power Plants on commercial meters

TherAccelerated Depreciation  is 40% accelerated depreciation benefits on installing solar power plants on commercial meters.

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. 8.50/unit is 3years two months, 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 years, without accelerated depreciation benefit.

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.

Please check on website:https://www.incometaxindia.gov.in/_layouts/15/dit/mobile/viewer.aspx?path=https://www.incometaxindia.gov.in/charts%20%20tables/depreciation%20rates.htm&k=&IsDlg=0