Updated: Jan 14, 2022
EXPLAINING THE COMMERCIAL AND INDUSTRIAL USER'S ACCELERATED DEPRECIATION TAX BENEFITS
The MNRE (Ministry of New and Renewable Energy - Central Government) has set a target of installing 227 Gigawatts (22,70,00,000 kilowatts) of renewable energy by 31 March 2022. To accomplish this, they are encouraging solar in a variety of ways, one of which is by giving commercial clients with accelerated depreciation tax benefits. The government of India is also promoting solar energy in the corporate and private sector through tax relief by allowing them to claim a higher rate of depreciation, more commonly referred to as accelerated depreciation / AD Benefit, under section 32 of the Income Tax Act.
For commercial and industrial electricity consumers, the Government of India's accelerated depreciation tax benefits on solar energy installations are extremely advantageous and help make solar energy a viable and sustainable option for commercial customers. To encourage the use of solar energy in commercial and industrial sectors, the Indian government grants accelerated depreciation on solar power plant fixed assets. At the moment, the maximum rate of acceleration that may be claimed in a year is 40%. Comparatively, the normal rate of depreciation for general plant and machinery is 15%.
The benefit of accelerated depreciation enables commercial and industrial consumers of solar energy in India to discount their investment in a solar power plant at a rate significantly higher than that of other fixed assets. This allows the user to claim tax benefits on the value of the asset depreciated during the year.
Scenario valid until March 31, 2017
Until March 2017, businesses could claim up to 80 percent depreciation on solar power plants in their first year of operation. Additionally, pursuant to Section 32 (1) (ii A) of the Income Tax Act of 1961, a deduction of 20% of the actual cost of new plant and machinery installed for manufacturing purposes may be claimed. Thus, a solar energy project could qualify for 100% depreciation if it is in use for more than 180 days during the fiscal year. If the solar energy system is operational for less than 180 days, the depreciation benefit is split between two fiscal years. This policy was in effect for projects initiated in fiscal year 2016-17 or earlier.
After March 31, 2017
As a result of the new fiscal policy, all solar energy systems installed after 1 April 2017 will be eligible for the following benefits:
Solar plant that is operational for more than 180 days in a fiscal year is eligible for 40% + 20% depreciation. As a result, the asset owner can claim 60% depreciation in the first year. This is a significant benefit in and of itself, as it encourages investment in solar energy systems.
Solar energy systems that are operational for less than 180 days in a fiscal year are eligible for half of the full-year depreciation rate specified above. Thus, a solar asset owner can claim 30% depreciation (60 percent / 2).
For your convenience, the following example explains the idea further: Assume that a commercial or industrial user, Acme Pvt. Ltd., is subject to a 30% income tax bracket. Now, suppose this user constructs a general asset worth Rs. 10 crore in a particular fiscal year, with a projected asset life of 20 years. Under typical circumstances, the user can claim a 5% annual depreciation on Rs. 10 Crore (assuming linear depreciation, 100% /20yr = 5%/yr). for income tax purposes.
This translates into a tax benefit of 30% of 5% of Rs. 1.0 Crore each year = Rs. 5 Lakh per year for the next 20 years.
However, when a user invests in a Solar Plant, the user is allowed to depreciate the asset at 40%, allowing the user to entirely depreciate the asset within three years and saving a tax of Rs. 1.2Cr, Rs. 1.2Cr, and Rs. 60 Lacs in the first, second, and third years of operation, respectively. This is the advantage of commercial customers receiving accelerated depreciation tax benefits.
For anyone who values their time and money, the prospect of saving lakhs in taxes within the first three years of installing a Solar PV system is more appealing than saving the same amount over a twenty-year period. Thus, the project's ROI (Return on Investment) increases as a result of the solar plant's accelerated depreciation.
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