Understanding Accelerated Depreciation of Solar Power Assets in India

Accelerated depreciation is a crucial driver of investments in the adoption of solar power in India, offering commercial and industrial consumers faster depreciation on solar power plant investments than traditional plants and machinery. Utilizing accelerated depreciation benefits in solar projects enables investors to trim current taxes, and rattling those tax savings for future investments supports long-term financial growth in the renewable energy sector.

In recent years, the affordability of solar panels has empowered businesses and homeowners alike, offering various advantages. New market contracts and a continuous decline in purchase and installation costs have made solar systems more accessible. Lease-to-buy options provided by solar providers enable the delivery of energy at a cost lower than traditional utilities.

Switching to renewable energy not only promotes environmental responsibility but also serves as a highly effective cost-saving measure. Section 32 of the Indian Income-tax Act of 1961 allows companies to enjoy accelerated depreciation benefits based on the specific asset class.

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The Indian government is actively encouraging widespread adoption of solar energy. The Ministry of New and Renewable Energy (MNRE) has set an ambitious target of achieving 10,000 megawatts of renewable energy installations by 2030. To support this goal, the MNRE is implementing various strategies, including extending accelerated depreciation tax benefits to commercial clients – solar manufacturers and consumers of solar powered energy in the production process.

To further promote solar energy in corporate and private sectors, the Indian government offers tax relief through an elevated rate of depreciation, commonly known as accelerated depreciation (AD) benefit under section 32 of the Income-tax Act. Section 32 allows clients to claim 40 percent depreciation rebate year-on-year on a solar project.

The standard depreciation rate for general plant and machinery in India stands at 15 percent. However, the accelerated depreciation tax benefits provided by the Indian government on solar energy installations offer significant advantages for commercial and industrial electricity consumers. These incentives play a pivotal role in making solar energy not just an environmentally conscious choice but also a financially viable and sustainable one for businesses.

What is section 32 of the Income-tax Act, 1961?

Section 32 of the Income-tax Act outlines provisions related to depreciation on assets and provides the framework for the calculation of depreciation allowances. It establishes the methodology for determining the deduction that businesses can claim for the wear and tear, obsolescence, or depreciation of their tangible assets over time. The section defines the rules and rates for depreciation, offering guidelines on how businesses can account for the reduction in value of their assets as they are used in income-generating activities. This section plays a crucial role in determining the taxable income of businesses by allowing them to account for the gradual loss in value of their assets over their useful lives.

Under section 32(1)(iia):

If an assessee is engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power, an additional depreciation of 20 percent of the actual cost of new machinery or plant (other than ships and aircraft) shall be allowed as deduction.

[Note: If a taxpayer is involved in the business of power generation or power generation and distribution and follows the Straight-Line Method (SLM) depreciation according to section 32(1)(i), no extra depreciation is applicable.]

For enterprises set up on or after April 1, 2015, in designated backward areas notified by the Central Government, an additional depreciation of 35 percent is available on new machinery or plant (excluding ships and aircraft). These include states such as Andhra Pradesh, Bihar, Telangana, and West Bengal.

Depreciation rate in India for solar assets

With effect from April 1, 2017, the Department of Revenue, Ministry of Finance, India, slashed the depreciation limit to 40 percent, from 80 percent, on specific assets. Nevertheless, the tax provision remains lucrative, as investors can anticipate a payback period of 4-5 years for their investment in solar power generation systems.

Advantages of accelerated depreciation in solar power

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Accelerated depreciation has emerged as a pivotal factor in driving investments in solar photovoltaic (PV) projects in India. Particularly beneficial for commercial and industrial consumers, this approach allows for a faster depreciation of investment in a solar power plant compared to conventional plants and machinery.

For a solar plant operational for over 180 days in a fiscal year, it qualifies for a 40 percent depreciation in the first year, followed by an additional 20 percent. Solar operators can consequently claim up to 60 percent depreciation in the initial year.

1. In terms of tax saving, operators can deduct a substantial portion of the solar plant’s cost during its early operational stage. This translates to reduced taxable income and lower income tax liabilities, freeing up cash flow for reinvestment in the initial phase.
2. The cost saved by businesses enables them to reduce tax payments in the short term, allowing the redirection of cash into other critical areas like research and development, expansion initiatives, or loan repayments.
3. One may note the rapid loss in value of capital assets like solar power plants. Accelerated depreciation facilitates a quicker recovery of investments in these assets. Tax incentives linked to the solar plant depreciation rate encourage business owners to reinvest in capital assets, recognizing them as financially viable options.
4. Accelerated depreciation allows for higher tax deductions in the early years compared to present value deductions in later years. This alleviates the long-term costs associated with acquiring and maintaining assets.

India Income-tax Act 1961: Depreciation (Machinery or plant)

any new machinery or plant is installed during the previous year relevant to the assessment year commencing on or after the 1st day of April, 1988, for the purposes of business of manufacture or production of any article or thing and such article or thing—

(a) is manufactured or produced by using any technology (including any process) or other know-how developed in, or

(b) is an article or thing invented in, a laboratory owned or financed by the Government or a laboratory owned by a public sector company or a University or an institution recognised in this behalf by the Secretary, Department of Scientific and Industrial Research, Government of India,

such plant or machinery shall be treated as a part of block of assets qualifying for depreciation at the rate of [40] per cent of written down value, if the following conditions are fulfilled, namely:

• the right to use such technology (including any process) or other know-how or to manufacture or produce such article or thing has been acquired from the owner of such laboratory or any person deriving title from such owner;
  
• the return furnished by the assessee for his income, or the income of any other person in respect of which he is assessable, for any previous year in which the said machinery or plant is acquired, shall be accompanied by a certificate from the Secretary, Department of Scientific and Industrial Research, Government of India, to the effect that such article or thing is manufactured or produced by using such technology (including any process) or other know-how developed in such laboratory or is an article or thing invented in such laboratory; and
  
• the machinery or plant is not used for the purpose of business of manufacture or production of any article or thing specified in the list in the Eleventh Schedule to the Act.

Key takeaway

Depreciation in the context of solar energy is a cost that impacts revenue and tax liability. Leveraging accelerated depreciation benefits in solar projects allows investors to reduce current taxes and defer future payments. This strategy is especially advantageous since early years of solar projects often yield modest returns. Investors can retain tax savings for future investments, contributing to long-term financial growth. In the renewable energy sector, particularly in solar power, two key incentives include the economic advantages over traditional grid electricity and tax relief through accelerated depreciation. Accelerated depreciation is a method that significantly eases the initial costs of solar adoption by providing substantial tax breaks in the project’s first year.

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