Yes. In India, any investments in solar power plants can benefit from an important tax incentive – the Accelerated Depreciation (AD) benefit.

It works as follows:

If you are a profit making company, you need to pay corporate tax (35%) on your book profits. While calculating book profits, you add depreciation to your expenses, and thus the profit is reduced to that extent. As the tax is paid on book profit, the more depreciation you are able to add to the expenses, the lower is the tax paid.

Thus, if you are allowed to take a higher depreciation (called Accelerated Depreciation) amount in the first few years, it is obvious that the tax you pay decreases and thus your actual profits and cash flow increase.

Today, according to central government policies, any investment in solar power plants is eligible for an Accelerated Depreciation of 40%. This implies that you can allot 40% of the total project cost as depreciation in the first year, and 40% of the remaining project cost in the subsequent years, and so on.

This results in a very attractive equity payback period.

 How?

For industrial and commercial sectors, typically only about 30% of the total cost of a solar power plant is invested as equity, and the rest are from bank loans. With the AD benefits, you get a cash flow incentive of 14% of total project cost the very first year. Thus, almost half (14%/30%) of your equity is already back to you the very first year. In the subsequent two years, the recurring AD benefit pays you back the rest of your equity.

Thus, even without factoring the cash savings from using solar power, the equity payback period for a solar power plant with AD benefits is fewer than three years; with additional cash savings, it can be as low as two years!

Stuff to Remember

Investors in solar power plants in India can avail the tax benefit in the form of a 40% Accelerated Depreciation on investment. This benefit can significantly reduce the equity payback period.