Understanding accelerated depreciation in solar power projects

Understanding accelerated depreciation for solar

power projects

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Understanding accelerated depreciation in solar power projects

Table of Contents
What is accelerated depreciation? ................................................................................... 3
What is this stipulation of 31st March and 1st Sep in the claiming of Accelerated
Depreciation benefit for a solar power generation plant? ................................................ 4
How do we claim the AD for a solar power generation plant? By regular tax returns or is
there any special form for claiming the Accelerated Depreciation for solar power
projects? .......................................................................................................................... 4
Can a group company of a tax paying company set up a solar plant and claim
depreciation? ................................................................................................................... 4
Can individuals set off depreciation benefit in a partnership firm? .................................. 5
What all constitute plant and machinery in a solar plant? ................................................ 5
At what stage of commissioning can one claim depreciation? ........................................ 5

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Understanding accelerated depreciation in solar power projects

What is accelerated depreciation?

Surprisingly, there is nothing called Accelerated Depreciation in solar power generation or for that matter
in any other field. And, the IT Act does not mention it either. It does not appear in the glossary, appendix
or the contents of the Act.
It is a method of depreciation used for accounting or income tax purposes that allows greater deductions
in the earlier years of the life of an asset. By increasing the deductions taken during the first few years of
business, one can lower the overall tax burden.
In normal course, depreciation is 15% on plant and machinery for any business.
However, with a view to attract investor energy into the Indian solar power generation market, the
Government of India has allowed claiming 80% depreciation in year one of the commissioning of the solar
power generation plant.
The following example will help understand it better:
Suppose that the total project cost is Rs 150 lacs.
If a solar power generation plant costs Rs 150 lacs, then the company setting up that plant can claim 80%
depreciation in the first year itself.
Depreciation of 80 % is allowed on plant and machinery of the solar power plant.
80 % of Rs 150 lacs is Rs 120 lacs. This value can be expensed in the very first year itself, which entails
the name Accelerated Depreciation, since a large value of assets is shown to have depreciated in the
very beginning. (depreciating 80% in one year instead of 15%).
Now, 33.99% of Rs 120 lacs is about Rs 40.79 lacs.
Consequently, for a solar power project worth Rs 150 lacs, a tax saving of Rs 40.79 lacs is expected with
accelerated depreciation.
Notably, since AD benefit in year one is Rs 40.79 lacs, the effective project cost of solar power project for
a company eligible to claim AD benefits would roughly be Rs 109 lacs.
In addition, AD benefits roll over to subsequent years as, the project developers can depreciate 80% of
the written down value of the project till the time it becomes nil. Thus the saving in taxes will be nearly Rs
50 lacs. The table below will clarify the concept further:
Years

Unit

Opening

100%

20%

4%

1%

Rs Lakh

150.00

30.00

6.00

1.20

80%

16%

3.20%

0.64%

Rs Lakh

120.00

24.00

4.80

0.96

20%

4%

0.80%

0.16%

Rs Lakh

30.00

6.00

1.20

0.24

Accelerated Depreciation

Rs Lakh

120.00

24.00

4.80

0.96

Tax Benefit

Rs Lakh

40.79

8.16

1.63

0.33

Total tax benefit due to AD

Rs Lakh

50.90

Allowed during the year (80% of the

opening)
Closing

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Understanding accelerated depreciation in solar power projects

What is this stipulation of 31st March and 1st Sep in the claiming of
Accelerated Depreciation benefit for a solar power generation plant?
As per Section 32 of the Income Tax Act, 1961, if an asset is put to use for less than 6 months, only the
50 % of the prescribed rate of depreciation is allowed to be deducted from the profits of business in that
year. It means if the asset is put to use for more than 6 months, even for a single day more than 6
months, then 100 % of the prescribed rate of depreciation will be allowed to be deducted from the profits
of the business.
The following link (second proviso to section 32(1)(i)) clearly specifies that depreciation has to be
restricted to 50% of the prescribed percentage where an asset was used for a period of less than 180
days in a previous year:
http://law.incometaxindia.gov.in/dittaxmann/incometaxacts/2005itact/section32.htm
On the other hand, the following prescribes 80% as rate of depreciation for solar power projects:
http://law.incometaxindia.gov.in/DIT/File_opener.aspx?page=ITRU&schT=rul&csId=4a23cee1-181845d6-ab19-f155e08ed789&rNo=&sch=&title=Taxmann%20-%20Direct%20Tax%20Laws

How do we claim the AD for a solar power generation plant? By regular tax
returns or is there any special form for claiming the Accelerated Depreciation for
solar power projects?
The rate of depreciation allowed under the income tax for solar power generation units is 80 % and it is
an accelerated rate of depreciation. So the companies need to file the regular tax returns only, and there
is no special form prescribed for claiming the depreciation benefit.

Can a group company of a tax paying company set up a solar plant and claim
depreciation?
It is a case of set off of loss under the same head of income (section 70) of the Income Tax Act. There
are 5 heads of income under which income of assesse is being assessed under the income tax:
1.
2.
3.
4.
5.

Income from salaries

Income from house properties
Profit and gains of business and profession
Income from capital gains
Income from other sources

This case falls in the category of income under profits and gains of business and profession.
And as per section 70 of the Act, set off of loss under the same head of income is allowed. This implies
that a group company, which is paying taxes on account of business or profession, can set off its losses
arising from solar activities under the head of business or profession.

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Understanding accelerated depreciation in solar power projects

Can individuals set off depreciation benefit in a partnership firm?

No. Any individual having any profit or loss cannot be assessed in the hands of a partnership firm in
which he or she is the partner. So the benefit of depreciation in the case of an individual cannot be
passed to the partnership firm.
But, as per Section 70 of this Act, a loss because of business or depreciation can be set off under the
same head of income. This means that if an individual is having income under the head business or
profession he/she can set off her business loss arising out of solar business.
In other words an individual having huge business profits can enter into the business of solar power
generation for the benefit of claiming accelerated depreciation so that his or her tax liability can be
minimized.

What all constitute plant and machinery in a solar plant?

Everything that can be depreciated. Land, naturally, become the exception.

At what stage of commissioning can one claim depreciation?

Only after the production starts. The idea is that the machinery should be put to use.

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