| Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
Year 8 |
| At present rate of depreciation, till 31st March 2017 |
| Scenario 1 |
| In this case, the investor can claim 100% depreciation, in F.Y. 2016-17. |
| Tax benefit |
40.79 |
- |
- |
- |
- |
- |
- |
| Payback period |
4 years 1 month |
| Internal rate of return |
25.2% |
| Scenario 2 |
| In this case, the investor can claim depreciation for half year of operation in F.Y. 2016-17. Thereafter, he can claim tax benefit at a depreciation rate
of 80% on the remaining cost of the asset in the subsequent years. |
| Tax benefit 20.39 |
16.32 |
3.26 |
0.65 |
0.13 |
0.03 |
0.01 |
- |
| Payback period |
4 years 1 month |
| Internal rate of return |
24.4% |
| At proposed rate of depreciation, w.e.f 1st April 2017 |
| Scenario 3 |
| In this case, the investor can claim 60% i.e (40+20)% depreciation benefit in F.Y. 2017-18. Thereafter, he can claim tax benefit at a depreciation rate of 40% on the remaining cost of the asset in the subsequent years |
| Tax benefit 24.47 |
6.53 |
3.92 |
2.35 |
1.41 |
0.85 |
0.51 |
0.31 |
| Payback period |
4 years 3 month |
| Internal rate of return |
24.2% |
| Scenario 4 |
| In this case, the investor can claim 60% i.e (40+20)% depreciation benefit in F.Y. 2017-18. Thereafter, he can claim tax benefit at a depreciation rate of 40% on the remaining cost of the asset in the subsequent years. |
| Tax benefit 12.24 |
11.42 |
6.85 |
4.11 |
2.47 |
1.48 |
0.89 |
0.53 |
| Payback period |
4 years 4 month |
| Internal rate of return |
23.4% |
preciation in year one of commissioning of
solar power plant. Also as per Section 32 (1)
(ii A)of Income Tax Act 1961, an additional
depreciation of 20% (max.) of actual cost
can be claimed if new plant and machinery
is installed for purpose of manufacturing.
Hence, one can claim 100% depreciation
for a solar power project, if the asset is in
use for more than 180 days of the fiscal
year. If the solar power plant is commissioned
for a period of less than 180 days,
then the depreciation benefit is split over
two financial years. This applies to projects
commissioned in fiscal year 2016-17.
Post Union Budget 2016-17
As per Union Budget 2016-17, GoI has
proposed to cap the higher rate of depreciation
at 40% which is 50% of the existing
depreciation rate. It will be with effect
from April 1, 2017.
Let’s understand the same with the help
of an example:
Assumptions:
- Cost of solar power project: Rs. 120
lacs.
- Tax rate: 33.06%
- Depreciation rate till 31st March 2017
: 80%
- Depreciation rate w.e.f 1st April 2017:
40%
- Additional depreciation rate as per
section 32(1)(iiA) of Income Tax Act of
1961: 20%
We will observe four scenarios as mentioned
below (see table).
- Project commissioned for more than 180 days, during H1 (March – September) of 2016-17.
- Project commissioned for less than 180 days, during H2 (September – March) of 2016-17
- Project commissioned for more than 180 days, during H1 (March – September) of 2017-18
- Project commissioned for less than 180 days, during H2 (September – March) of 2017-18
As observed in the table above, due to
a proposed cap on the rate of depreciation,
the benefit that was available to
the investor till date will now be halved
in the first year and spread over the subsequent
years. Though, this has been
considered as a setback to the renewable
sector, it has not affected much the
viability of the solar power systems. The
investor can still expect a payback of 4-5
years for an investment in solar power
generation systems. Hence, we can safely
say that solar power will still remain as
an attractive investment in the coming
financial year
