India ranks 4th globally in renewable energy capacity, and solar power generation is experiencing rapid growth thanks to massive government support. While we still have a long way to go, solar power is set to dominate the energy sector by 2030. The government has clearly identified renewable energy as a key priority for achieving net zero emissions. And if you are keen to enter the solar energy sector, you should know the various tax benefits and the solar plant depreciation rate in 2023.
Let’s begin by understanding what depreciation is and how it affects solar power installations.
What is Depreciation?
Depreciation is the process of writing off the cost of an asset over the course of its life. It is mandatory to deduct depreciation in the profit and loss statement of an asset. The Income Tax Act allows the solar plant depreciation rate to be calculated under the WDV method. You can choose the option of the straight-line method but the WDV process is used widely.
Now that we’ve explored what depreciation is and how it’s calculated, let’s delve into the specifics of determining the solar plant depreciation rate under the WDV method
How is Depreciation Calculated Under the WDV Method?
The solar plant depreciation rate is calculated as per the WDV method in the following ways:
Step 1. Initial Cost Calculation:
- Calculate the initial cost, or the capital expenditure incurred to set up the plant.
- There are additional expenses related to the purchase of inverters, solar projects, land acquisition, mounting structures, installations, and other costs.
Step 2. Determining Depreciable Value:
- Next, subtract the subsidies, incentives, or other grants received from the initial cost to arrive at the exact depreciable value.
- This is the value that will be used to estimate the solar plant depreciation rate.
Step 3. Calculating Depreciation Rate:
The solar depreciation rate in 2023 in India will be 40%. You can get an additional depreciation of 20% on the total capex incurred. The government has taken this financial step to promote the adoption of solar energy and make it economically viable for developers and investors alike.
However, keep in mind that these rates are subject to change. It’s always a good idea to consult a tax professional to understand all the technicalities of the solar depreciation rate.
Step 4. Depreciation on Solar System Calculation:
Calculate the annual depreciable expense using the formula under the WDV method which is:
Annual Depreciation= ( Opening WDV * Depreciation Rate) * 100
Opening WDV: This is the initial cost or written-down value from the previous year. The opening WDV will be the initial cost of the plant for the first year. For subsequent years, it will be the closing WDV of the previous year.
For example, if the initial cost of the solar plant is Rs 1000000 and the depreciation rate is 40%, the calculation for the first year will be:
Depreciation Year 1: (1000000*40/100) = 400000
Calculate the solar plant depreciation rate for the second year based on the closing WDV number from the first year.
Closing WDV: Calculate the closing WDV for each year. This will be the value that you have arrived at after subtracting the depreciation from the current year. The formula is:
Closing WDV = Opening WDV – Annual Depreciation
The second year value will be: Opening WDV year 2- Annual Depreciation Year 1
Continue the process each year until the closing WDV reaches a minimal or a scrap value that is a percentage of the initial cost.
Moving on, let’s check out how the solar plant depreciation rate is calculated under the straight-line method.
How is Depreciation Calculated Under the Straight-Line Method
The initial cost and expense are calculated to determine the exact capital expenditure value that has been incurred to set up a solar plant. Similar to the WDV method, subtract the initial incentives, subsidies, and grants to get the final value which will be used for calculating the depreciation of a solar plant. Here is how the calculation works:
The formula for straight-line depreciation is: (depreciable value * depreciation rate) / 100
For example, if the value of the solar plant is Rs 1000000 and the depreciation rate is 40%, the annual depreciated expense will be:
Annual Depreciating value: (1000000*40)/100 = 400000
Accumulated depreciation: Monitor the accumulated depreciation over the lifespan of the plant. The amount represents the total expense claimed since the solar power plant was installed. You can deduct the annual expense from your taxable income to reduce your income tax liability.
Consider consulting an expert or a qualified tax professional to gain personalized guidance on the solar plant depreciation rate. You can also get in touch with Sustvest for additional information on solar energy.
Now, let’s take a look at accelerated depreciation and benefits.
Accelerated Depreciation and its Benefits
Accelerated depreciation has played a crucial role in boosting solar PV investments in India. Commercial and industrial consumers can lower their investment in a solar power plant at a rate significantly higher than general plants and machinery. Users can claim tax benefits on the amount depreciated during the year.
A solar plant that is operational for more than 180 days in a fiscal year is eligible for 40 + 20% year depreciation in the first year. Solar operators can claim up to 60% depreciation in the first year. The accelerated approach creates larger depreciation in the early years and lower expenses in the later years. The method offers the following benefits:
1. Tax Savings
Operators are able to deduct a significant portion of the solar plant’s cost in the early stage of its operation. This leads to lower taxable income and reduced income tax liabilities. The immediate tax benefits free up cash flow in the early stage.
2. Enhanced Cash Flow
Accelerated depreciation helps businesses to cut down tax payments in the short term. This is particularly useful as you can divert the cash into other areas of the business like research and development, funding expansion, or loan repayment.
3. Faster ROI
Capital assets like a solar power plant lose value rapidly. Rapid depreciation can help industry players to recover their investments in asset classes quickly. This aligns with the economic reality that most of the assets lose their value in the early stage of their operation.
4. Boost in Capital Investment
The tax benefits on solar plant depreciation rate directly incentivize business owners to reinvest into capital assets as they are seen as a financially viable option. Ultimately, this leads to economic growth and innovation.
5. Easy Maintenance and Reduction in Costs
Every business owner knows that managing an asset in the long term can be a hectic task. However, accelerated depreciation allows tax deductions that are higher than present value deductions in the later years of the asset. This reduces the cost of acquiring and maintaining an asset in the long term.
In addition to the above benefits, the government offers faster depreciation to promote the adoption of renewable energy projects. However, keep in mind that there are certain restrictions on using accelerated depreciation such as caps on the amount that can be depreciated in a single year.
Having said that, let’s move to the frequently asked questions of solar plant depreciation rate.
FAQs – Solar Plant Depreciation Rate
What is 40% depreciation on Solar?
The industry operator is eligible for a 40% solar plant depreciation rate which has been operational for more than 180 days in a fiscal year. An additional 20% is also deducted from the initial value of the plant. This gives tax benefits to a business owner.
What are depreciation methods for solar panels?
As per the Solar Panel Depreciation Rate Income Tax Act, there are two methods for calculating the overall solar plant depreciation rate in India.
- Written Down Value Method( WDV)
- Straight-Line Method
What is the depreciation rate of solar in India?
As per the Income Tax Act, the solar plant depreciation rate in India is 40%. However, depreciation and tax rates are subject to change. It is advised to consult a finance expert on the prevailing tax benefits of solar power plants.
What is the GST on solar power generation?
The government has set all renewable energy projects and devices at 12% GST.
In conclusion, solar power capacity has grown tenfold in the last five years. Renewable energy is at the forefront of solving the global climate crisis. Hence, the government is rapidly accelerating solar power adoption. There are several tax benefits, rebates, and incentives offered by the government. The solar plant depreciation rate will keep on changing to augment the growth of the industry.
If you are interested in renewable energy investments, check out Sustvest for detailed financial information.
Founder of Sustvest
Hardik completed his B.Tech from BITS Pilani. Keeping the current global scenario, the growth of renewable energy in mind, and people looking for investment opportunities in mind he founded SustVest ( formerly, Solar Grid X ) in 2018. This venture led him to achieve the ‘Emerging Fintech Talent of the Year in MENA region ‘ in October 2019.