The Indian Government offers benefits of accelerated depreciation; the business can claim or avail of a greater rate of depreciation reducing the tax payout, to promote solar power among corporations and the private sector. Currently, solar rooftops are eligible for an annual acceleration rate of 40%.
By the end of March 2022, the MNRE (Ministry of New and Renewable Energy – Central Government) hopes to have installed 227 Gigawatts of renewable power. They are promoting solar in a number of ways to achieve this, one of which is by providing commercial clients with tax benefits for accelerated depreciation.
Additionally, the Indian government encourages solar energy in the corporate and private sectors through tax breaks by enabling businesses to take advantage of accelerated depreciation, popularly known as the AD Benefit, under section 32 of the Income Tax Act.
The Government of India’s accelerated depreciation tax benefits on solar energy installations are very beneficial for commercial and industrial power consumers and help make solar energy a practical and sustainable alternative for commercial clients.
What is the Maximum Rate of Accelerated Depreciation?
The Indian government offers accelerated depreciation on fixed assets for solar power plants in order to promote the use of solar energy in the commercial and industrial sectors. Currently, a year can only claim a maximum rate of acceleration of 40%. For general plant and machinery, the typical rate of depreciation is 15%.
Commercial and industrial solar energy users in India can depreciate their investment in a solar power plant at a rate that is substantially higher than that of other fixed assets thanks to the benefit of accelerated depreciation. This enables the user to claim tax advantages on the asset’s value that has depreciated over the course of the year.
What are the Advantages of New Fiscal Policy?
All solar energy systems installed after April 1, 2017, will be qualified for the following advantages as a result of the new fiscal policy:
A solar power plant is eligible for 40% + 20% depreciation if it is operating for more than 180 days in a fiscal year. The asset owner can therefore write off 60% of depreciation in the first year. This alone is a huge advantage because it promotes the purchase of solar energy equipment.
Less than 180 days of operation in a fiscal year qualify solar energy systems for half of the aforementioned full-year depreciation rate. As a result, a solar asset owner may deduct 30% of its cost (60 percent/2).
Also Read: 5 Major Advantages of Solar Street Light
For your convenience, the principle is further clarified in the example below: Assume that Acme Pvt. Ltd. is a business or industrial user who must pay taxes at a 30% rate. Let’s say that during a specific fiscal year, this user develops a general asset with a value of Rs. 10 crore and an anticipated asset life of 20 years.
In normal conditions, the user may deduct 5% annually from the value of Rs. 10 crore (assuming linear depreciation, 100% divided by 20 years equals 5% annually), for tax-related reasons. This results in a tax credit of 30 percent on 5 percent of Rs. 1 billion every year, or Rs. 5 lakh each year for the following 20 years.