Accelerated Depreciation on Solar Assets (Section 32): A CFO's Cheat Sheet

For a CFO evaluating a solar investment, the financial returns extend beyond electricity savings. Section 32 of the Income Tax Act provides a powerful accelerated depreciation benefit on solar assets — one that can reduce the effective project cost by 10–15% in Year 1. This article is a concise guide to understanding and maximising this benefit.

What Is Accelerated Depreciation for Solar?

Under the Income Tax Act, solar photovoltaic power generating systems are classified as "energy saving devices" and qualify for a 40% depreciation rate under the Written Down Value (WDV) method. This is significantly higher than the standard 15% or 20% depreciation rate applicable to most plant and machinery.

In Year 1, you can claim 40% of the asset value as a depreciation deduction against your business income. If you're in the 25% corporate tax bracket, this translates to an immediate tax saving of 10% of the project cost — in the year of installation itself.

Year 1 Impact: A Worked Example

Consider a 1 MW solar project costing ₹4.2 crore (inclusive of all EPC costs but excluding GST for ITC-registered businesses):

Conditions and Qualifications

To claim the 40% accelerated depreciation, the following conditions must be met: (1) The solar system must be owned by the business entity — RESCO/OPEX models do not qualify since the asset is owned by the RESCO company. (2) The asset must be put to use in the financial year for which the depreciation is claimed. (3) The asset must be classified under the appropriate block under the Income Tax Act — your CA or tax advisor should confirm the block classification based on the specific components included in the solar system.

Half-Year Convention in Year of Acquisition

Under Section 32, if an asset is acquired and put to use for less than 180 days in the year of acquisition, only 50% of the applicable depreciation rate is allowed in that year. For a 40% depreciation rate, this means 20% in the acquisition year. This makes it important to commission your solar system before October 1 (the 180-day midpoint in a standard April-March financial year) to qualify for the full 40% depreciation in that financial year.

How AD Affects Project IRR

For a ₹4.2 crore 1 MW project generating ₹1.5 crore in annual electricity savings, the base-case IRR over 25 years is approximately 18–20%. When the Year 1 AD tax benefit of ₹42 lakh is factored in as an early cash inflow, the IRR improves to 22–24%. For businesses with high taxable income seeking to shelter it, the AD benefit makes solar even more attractive than the energy savings alone justify.

ARIA Green Energy's project proposals include a full 25-year financial model with AD benefit incorporated, so your CFO and CA can evaluate the complete investment case — not just the payback period.