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.
The normal depreciation rate for any general plant and machinery is 15%.
Scenario uptil 31st march 2017
st 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
st 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).
Example
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 :-
| S.N. | Particulars | Value |
| 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
70% debt |
| 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 % |
Conclusion
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 !
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