Solar panels in recent times have become increasingly popular as a sustainable energy solution, offering both environmental benefits and financial savings.
However, like any other investment, it’s essential to understand the factors that can affect your returns. Below, we have delved into details of solar panel depreciation and covered all you need to know on how to make the most of your solar investment.
What is the Solar Panel Depreciation Rate?
Solar Panel Depreciation plays a pivotal role in stimulating ongoing innovation and fostering increased investments in renewable energy. Additionally, it serves as a means to help consumers control their upfront installation expenses.
But what exactly is depreciation? In essence, depreciation refers to the gradual reduction in the value of an asset over time. It allows businesses to recoup the costs associated with an asset as its value naturally diminishes throughout its operational lifespan.
However, for homeowners considering a transition to solar energy, the advantages of solar energy depreciation predominantly cater to businesses. This is because it is classified as a business expense.
The Indian government actively promotes solar power adoption within the corporate and private sectors through tax relief mechanisms. This is achieved by granting them the opportunity to leverage a more accelerated rate of depreciation. This is often referred to as AD Benefit under Section 32 of the Income Tax Act.
According to this legislation, the depreciation rate for solar panels is set at 40% using the Written Down Value (WDV) method. These solar devices are typically treated as fixed-asset investments.
As such, they undergo regular and systematic depreciation over a defined timeframe. The anticipated useful life of such solar installations is typically considered to be 5 years.
Depreciation Formula:
Depreciation = Cost of the Asset × Depreciation Rate
Where:
- The cost of the Asset is the initial purchase price of the solar panels.
- Depreciation Rate is the percentage rate at which the asset loses its value annually.
Example:
Let’s assume you’re a business owner in India who purchased solar panels for ₹10,00,000. The Income Tax Department has determined that the depreciation rate for solar panels is 15% per annum.
Using the formula:
Depreciation = ₹10,00,000 × 0.15
Depreciation = ₹1,50,000
So, in the first year, you can claim depreciation of ₹1,50,000 for your solar panels. This means you can deduct this amount from your business income before calculating your tax, thereby reducing your taxable income for that year by ₹1,50,000.
To simplify: If your business earned ₹20,00,000 in a year, after accounting for the solar panel’s depreciation, you’d only be taxed on ₹18,50,000.
Read More: Types of Solar Panels in India
Solar Panel Depreciation Calculator
Accelerated Depreciation Tax Benefits
The accelerated depreciation tax incentives offered by the Indian Government for solar energy installations hold substantial advantages for commercial and industrial electricity consumers. These incentives render solar energy a practical and sustainable choice for businesses.
Specifically, the Indian government provides accelerated depreciation benefits for fixed assets in solar power plants, permitting companies to declare a depreciation rate of up to 40% within a single year.
This rate is notably higher compared to the standard 15% depreciation rate applied to general plant and machinery.
This advantage empowers commercial and industrial users of solar energy in India to discount the depreciation of their investment in solar power plants.
Consequently, this enables users to realize tax benefits based on the depreciated value of the asset during the given year.
Current Solar Panel Depreciation Rate
- A solar power plant that has been operational for more than 180 days within a fiscal year is eligible for a 40 + 20% depreciation. The asset owner may thus write off 60% of depreciation in the first year. This alone has enormous benefits since it encourages the purchase of solar power equipment.
- A solar power plant that has been operational for fewer than 180 days during a fiscal year is eligible for half of the above-mentioned depreciation rate for the whole year. So, in percentage terms, the owner of a solar asset may deduct 30% of its cost (60% / 2).
Limitations
The accelerated depreciation benefits of solar panels have made solar installations an appealing investment for commercial and industrial users. However, it’s crucial to acknowledge that these advantages may not be accessible to all businesses.
Specifically, newly established Special Purpose Vehicle (SPV) firms often encounter difficulties in harnessing the benefits of accelerated depreciation. This is due to their inadequate taxable income during their initial years.
SPVs are legal entities established for a particular purpose, in this instance, to own and manage a solar power plant. During their early stages, these entities frequently generate limited income, resulting in a low taxable income. Consequently, the immediate advantages of accelerated depreciation are diminished since tax savings are directly proportional to taxable income.
Conclusion
The Indian government’s accelerated depreciation tax incentives have enhanced the allure of solar installations for commercial and industrial users. However, businesses must carefully assess their taxable income and operational financial structure before committing to such investments.
By grasping these intricacies, businesses can make well-informed choices and optimize the returns on their solar investments.
By understanding what depreciation is, you can enjoy the benefits of clean, renewable energy while maximizing your financial returns over the long term.
