Solar AD: 40% vs 25% Year-1 Tax Math 2026

Two solar projects of identical size, identical cost, and identical specification can produce wildly different Year-1 tax outcomes. The difference between a 40% Accelerated Depreciation (AD) claim and a 25%-equivalent AD claim in 2026 is rarely about the rate itself — it is about the date the plant is commissioned, the entity claiming, and whether the additional 20% depreciation under Section 32(1)(iia) is properly stacked. For a 100 kW commercial plant costing ₹40 lakh, the gap between a “good” AD year and a half-rate AD year is ₹1.5 lakh of cash tax saved in Year 1, with further compounding losses across the subsequent depreciation tail. For Chief Financial Officers (CFOs) signing the EPC contract in 2026, the date on the commissioning certificate is the single most expensive line item in the deal.

This guide is built for the commercial and industrial Capital Expenditure (CAPEX) buyer. It compares the 40% full-year AD rate (Section 32(1)(ii) plus the Section 32(1)(iia) bump where eligible) against the 25%-equivalent that results from the half-year rule plus part-year additional depreciation. It walks through the statutory wording, two side-by-side 100 kW worked examples, the Minimum Alternate Tax (MAT) interaction, the Income Computation and Disclosure Standards (ICDS) reconciliation, and the named 40% AD vs 25% AD Decision Path that Heaven Green Energy uses with every CAPEX client.

Direct answer. Under Section 32(1)(ii) of the Income Tax Act, 1961, a solar power plant earns 40% Year-1 Accelerated Depreciation on Written Down Value (WDV) if commissioned before 1 October of the financial year. If commissioned after 1 October, the proviso halves the rate to 20% — the “25% AD” outcome buyers see when additional depreciation under Section 32(1)(iia) is also part-rated. On a 100 kW plant at ₹40 lakh, the 40% path saves ₹4 lakh of Year-1 cash tax; the 25% path saves only ₹2.5 lakh.

If your project will commission in 2026 and your finance team is still pencilling the AD line into the Internal Rate of Return (IRR) model, this is the comparison that should drive the contract milestone schedule. Read on for the full mechanics.

Why Solar Got 40% AD — Income Tax Act Provisions

The Indian tax code does not grant 40% Accelerated Depreciation to solar plant by accident. It is the result of a deliberate Central Board of Direct Taxes (CBDT) classification placing “Solar power-based systems” inside the 40% renewable energy device block under Appendix I to the Income Tax Rules, 1962. The legislative chain runs through three documents — Section 32 of the Income Tax Act, 1961, Rule 5 of the Income Tax Rules, and Appendix I, Part A, Block of Assets 8(ix)(l) — and every successful AD claim is defended by reference to this chain at any Section 143(3) scrutiny.

Section 32(1)(ii) is the parent provision. It grants depreciation on tangible plant and machinery owned by the assessee and used for the purpose of business or profession. The proviso to Section 32(1) imposes the half-year rule: an asset put to use for less than 180 days in the year of acquisition gets only 50% of the prescribed rate. Section 32(1)(iia) layers on an additional 20% depreciation in Year 1 for new plant acquired by a manufacturer — a one-time bump, available only in the first year the asset is put to use, and never repeating. Section 32(2) handles the carry-forward of unabsorbed depreciation indefinitely. The CBDT bare-act extract on incometaxindia.gov.in carries the live wording; cross-check before filing because Finance Act amendments do occasionally touch Appendix I.

The 40% rate itself was not always 40%. Until Assessment Year (AY) 2017–18, solar enjoyed an 80% WDV rate — the rate that drove the original wave of corporate solar adoption. The Finance Act 2017 cut it to 40% with effect from AY 2017–18 onwards, and that 40% has remained the operative rate through every subsequent Finance Act including the 2025–26 cycle. There is no published proposal to alter the rate again in 2026. The Ministry of New and Renewable Energy (MNRE) continues to lobby for restoration to 80% as part of its annual budget submissions, but the Department of Revenue has not acted.

The practical effect of the 40% versus the (older) 15% general plant-and-machinery rate is enormous on a multi-crore solar plant. A ₹3.5 crore industrial solar installation under the general 15% rate would deduct only ₹52.5 lakh in Year 1; under the 40% solar rate it deducts ₹1.4 crore — a delta of ₹87.5 lakh of deduction, worth ₹26.25 lakh of cash tax saved at the 30% slab, in the first year alone. That delta is the entire reason solar AD is the single biggest line item on any CAPEX route solar deal in India in 2026, and it is the reason the 40% versus 25% comparison this guide makes is worth modelling carefully before you sign the commissioning milestone clause in your Engineering, Procurement and Construction (EPC) contract.

The 40% AD vs 25% AD Decision Path for Solar Buyers

This is the named framework Heaven Green Energy applies with every CAPEX client running the AD comparison. The Decision Path has five gates — each gate determines whether the project lands in the 40% (full-year, full-rate) bucket or the 25% (half-year-rule, part-rate) bucket. Skipping a gate does not invalidate the claim, but it does usually cost the client between ₹1.5 lakh and ₹4 lakh of Year-1 cash tax on a 100 kW plant. The Decision Path is sequential — earlier gates govern the choices available at later gates.

Gate 1 — Project Tax-Position Diagnosis

Before locking the commissioning date with your EPC contractor, map your projected taxable income for the financial year (FY) of commissioning. A profitable assessee in the 25%, 25.17%, or 30% slab benefits maximally from front-loaded AD. A loss-position assessee or one with very large brought-forward unabsorbed depreciation benefits less because the Year-1 deduction simply increases the carry-forward stack. Run the after-AD tax outcome under both the 40% scenario (commissioning before 1 October) and the 20% scenario (commissioning after 1 October) and quantify the time-value-of-money cost of the slower deduction. The discount rate to use is your Weighted Average Cost of Capital (WACC); we typically apply 11–13% for Indian commercial buyers in 2026.

Gate 2 — Half-Year Rule Application

The proviso to Section 32(1) of the Income Tax Act halves the depreciation rate when an asset is “put to use” for less than 180 days in the year of acquisition. “Put to use” is fixed at the date of commissioning — not the invoice date, not the payment date, not the delivery date. For a FY running 1 April to 31 March, the 180-day threshold lands on 30 September / 1 October. A plant commissioned on or before 30 September captures full 40% Year-1; a plant commissioned on or after 1 October captures only 20% Year-1, with the missing 20% rolling into Years 2 onwards on the residual WDV.

The 20% Year-1 outcome is what most buyers refer to colloquially as the “25% AD” path — the colloquialism stems from the rough arithmetic that 20% solar AD plus pro-rated additional depreciation can land near a blended 25% Year-1 deduction. The terminology is loose, but the cash impact is precise: on a ₹40 lakh plant, the gap is ₹8 lakh of Year-1 deduction missed.

Gate 3 — Additional Depreciation Eligibility (Section 32(1)(iia))

Section 32(1)(iia) grants a one-time additional 20% depreciation on new plant acquired by an assessee engaged in the manufacture or production of any article or thing. The additional 20% stacks on top of the 40% under Section 32(1)(ii), raising the effective Year-1 rate to 60% of the original cost for eligible manufacturers. Critically, the additional depreciation is also subject to the half-year rule — a plant commissioned after 1 October gets only 10% additional depreciation in Year 1, with the balance 10% available in Year 2. The additional depreciation never repeats: it is a one-time first-year bump only.

The trap: power generation businesses are excluded from Section 32(1)(iia) unless they have opted out under specific conditions. For a captive solar plant used by a manufacturer for its own production process, the additional depreciation is available because the assessee’s primary business is manufacturing, not power generation. For an independent solar developer selling power, it is not available. The contract and books must support the captive-use characterisation — a chartered engineer captive-consumption certificate is part of every Heaven Green Energy industrial solar handover for exactly this reason.

Gate 4 — Subsidy and Grant Netting

Explanation 10 to Section 43(1) of the Income Tax Act requires any subsidy, grant, or reimbursement received from the central or state government against an asset to be netted off the actual cost before depreciation is computed. For commercial buyers under state solar policies (Rajasthan, Gujarat, Maharashtra all run capital subsidy schemes for industrial solar), the subsidy reduces the depreciable base. PM Suryaghar is residential-only and does not feature for commercial buyers, but state-level capital subsidy programmes do. Skipping this netting calculation is the single most common disallowance trigger at scrutiny, and the calculation must appear as a supporting schedule to Form 3CD.

Gate 5 — Documentation Lock Before 31 March

Once the commissioning date is fixed and the AD rate is determined, the documentation must be locked before 31 March of the FY. The minimum set: line-itemised EPC tax invoice, chartered engineer commissioning certificate dated before 31 March, Distribution Company (DISCOM) net-meter installation report, fixed asset register entry under Block 8 at 40%, and insurance policy with start date matching commissioning. The Form 3CD clause 18 entries must reconcile to the asset register. Schedule Depreciation on Plant and Machinery (DPM) and Schedule ICDS in the Income Tax Return (typically ITR-6) carry the entries that actually claim the deduction. For the step-by-step Form 3CD walkthrough, see our how-to-claim accelerated depreciation guide.

Section 32(1)(ii) — 40% WDV for Solar Plant Machinery

Section 32(1)(ii) is the foundational provision. It grants depreciation on plant and machinery — including solar power-based systems — owned wholly or partly by the assessee and used for the purpose of business or profession in the previous year. The depreciation is computed on the Written Down Value (WDV) of the block of assets at the rates prescribed by Rule 5 read with Appendix I. For solar power-based systems, that rate is 40% under Appendix I Part A Block 8(ix)(l).

The WDV method works on a reducing-balance basis. In Year 1, you apply 40% to the original cost. In Year 2, you apply 40% to the residual 60%. In Year 3, you apply 40% to the residual 36%. By the end of Year 4, you have written off 87.04% of the original cost; the tail keeps running at diminishing amounts. The block-of-assets approach pools all 40% assets together — if your business owns other 40% block assets (computers were historically 40% before reclassification, certain pollution-control equipment is at 40%), the solar plant joins the same block and the depreciation is computed on the aggregate WDV.

The CBDT classification of solar inside the 40% block dates from the 1986 amendments and has survived every subsequent re-rationalisation. A 2017 CBDT clarification specifically confirmed that solar inverters, mounting structures, transformers, and balance-of-system components, when capitalised as part of an integrated solar power generating system, all fall within Block 8(ix)(l) and qualify for the 40% rate. Separating these components into different blocks is technically allowed but commercially disadvantageous — the 40% rate is hard to beat.

For an EPC contract with a turnkey scope, the entire installed cost — modules, inverter, mounting structure, AC and DC cables, transformers, civil works, commissioning charges, professional fees, freight, insurance attributable to the asset, and Goods and Services Tax (GST) where Input Tax Credit (ITC) is not claimed — capitalises into the single solar plant asset at the 40% rate. This is the simplest and cleanest approach; complications arise only when batteries are deployed (the Income Tax Department has sometimes argued batteries should be classified as electrical fittings at 15%, though the prevailing view is that integrated battery-energy-storage forms part of the solar plant at 40%).

For a deeper look at the foundational AD mechanics, see our companion guide on accelerated depreciation on solar in India.

Section 32(1)(iia) — 20% Additional Depreciation Y1 Only

Section 32(1)(iia) is the silent multiplier on solar AD. It grants a one-time additional 20% depreciation in Year 1 on the cost of any new plant or machinery acquired and installed after 31 March 2005 by an assessee engaged in the business of manufacture or production of any article or thing. The additional 20% stacks directly on top of the normal 32(1)(ii) depreciation — so a manufacturer commissioning a solar plant before 1 October captures 40% + 20% = 60% Year-1 effective rate.

The additional 20% is genuinely one-time. It applies only in the first year the asset is put to use. From Year 2 onwards, only the normal 40% under 32(1)(ii) continues to run on the residual WDV. There is no recurrence of the additional 20% in any subsequent year. This makes the Year-1 commissioning date even more financially consequential than the headline 40%-versus-20% comparison suggests, because the additional depreciation is the most rate-sensitive component of the entire claim.

The half-year rule cuts the additional depreciation too. A plant commissioned after 1 October gets only 10% additional depreciation in Year 1 (50% of 20%), with the balance 10% available in Year 2 — the only exception to the “Y1 only” rule, specifically for half-year-affected claims. This is laid out in the proviso to Section 32(1)(iia) and reaffirmed by CBDT guidance.

Eligibility is the tricky part. Section 32(1)(iia) is restricted in two ways. First, it is available only to assessees engaged in the manufacture or production of articles or things — pure trading, service, and Information Technology (IT) businesses are excluded. Second, it is not available where the new plant is installed in office premises, residential accommodation, guest house, or any office appliance. A captive solar plant on the rooftop of a manufacturing shed clearly qualifies; a solar plant on the rooftop of a corporate head office may not. The captive-consumption agreement and the chartered engineer’s plant-use certificate are the two documents that defend this characterisation at audit.

Note: for assessees who have migrated to the Section 115BAA regime (22% base corporate tax rate, no MAT) or Section 115BAB (15% base for new manufacturers, no MAT), additional depreciation under Section 32(1)(iia) is expressly disallowed. The trade-off is real — a Section 115BAA company saves the surcharge-and-cess differential against the older 30% regime but forfeits the additional 20% bump. For most solar buyers on the new regime, the AD claim stays at 40% Year-1; for those still on the old regime running manufacturing, the AD claim can reach 60% Year-1. Our finance team models this trade-off explicitly before any contract is signed; see the framework comparison in OPEX vs CAPEX 2026.

CFO-grade AD modelling, included. Heaven Green Energy ships a project-specific AD + MAT + IRR spreadsheet with every commercial CAPEX proposal — quantifying the 40% versus 25% delta against your actual tax slab and commissioning date. Request a turnkey commercial CAPEX proposal.

When You Get 40% (full year) vs 25% (half-year rule)

The proviso to Section 32(1) is the most expensive sentence in the Income Tax Act for solar buyers in India in 2026. It reads, in substance, that where an asset is acquired during the previous year and put to use for the purpose of business or profession for a period of less than 180 days in that previous year, the depreciation allowable is restricted to 50% of the rate prescribed. For solar at 40%, that means 20% in Year 1 if the plant is put to use for fewer than 180 days. For a FY running 1 April to 31 March, the 180th day from 31 March (counting backward) lands on approximately 2 October — so the rule of thumb is: commission by 30 September to capture full 40%; commission on or after 1 October and capture only 20%.

The “25% AD” terminology that finance teams use in conversation refers to the blended Year-1 deduction that emerges after the half-year rule is applied to both the Section 32(1)(ii) base rate and the Section 32(1)(iia) additional depreciation. For a manufacturer commissioning after 1 October: 20% (half of 40%) + 10% (half of 20% additional) = 30% Year-1 effective. For a non-manufacturer commissioning after 1 October: 20% Year-1 only, no additional. The colloquial “25%” sits between these two — the actual figure varies by entity type.

The Year-1 missed depreciation is not lost. It shifts into Year 2 and onwards via the higher residual WDV at year-end. But the time-value-of-money cost is meaningful: on a ₹40 lakh plant at 25% slab, a one-year deferral of ₹8 lakh of deduction at a WACC of 12% costs the company roughly ₹24,000 in Net Present Value (NPV) terms. On a ₹3.5 crore plant, the same calculation costs ₹2.1 lakh of NPV. These are not large numbers in absolute terms, but they are 100% avoidable by aligning the commissioning milestone with the financial year.

The commissioning-date trap most commonly catches industrial buyers in two situations. First, projects with monsoon delays — the Indian solar installation season tightens around October–November as monsoon clearance lifts, and a project that started construction in August can easily slip past 30 September commissioning. Second, projects where the buyer wanted to “test for a month before signing off” — operational caution that defers commissioning by 30 days and halves the AD in the process. Heaven Green Energy’s project management approach hard-locks the commissioning milestone at 25 September for any FY-end-targeted CAPEX, with a 5-day buffer before the 30 September cutoff.

For projects that slip past 30 September, the right tactical response is to defer commissioning into the following FY entirely (commission after 1 April) — because a plant commissioned in October captures only 20% Year-1, but a plant commissioned in April of the next FY captures the full 40% with 11 months of generation time. The 5-month commissioning delay costs you generation revenue but recovers the full AD. The maths is project-specific; our solar ROI calculation guide walks through the trade-off.

100 kW Commercial AD Calculation — 40% vs 25% Scenarios

A 100 kW rooftop commercial solar system at the 2026 EPC benchmark of ₹40 per watt (turnkey, GST inclusive) costs ₹40,00,000. The buyer is a private limited company at the 25% effective tax rate (post-2024 corporate tax regime, manufacturing assessee under Section 115BAA-equivalent terms with surcharge and cess simplified to a flat 25% for clarity of this comparison). We compare two scenarios: Scenario A, plant commissioned on 15 August 2026 (full 40% Year-1); Scenario B, plant commissioned on 10 November 2026 (half-year-rule 20% Year-1).

Scenario A — 40% Full-Year AD (commissioned 15 August 2026)

Scenario B — 25%-Equivalent AD (commissioned 10 November 2026)

The Year-1 cash tax delta is ₹2,00,000 (₹4 lakh in Scenario A versus ₹2 lakh in Scenario B). That is the cost of slipping past the 30 September commissioning cutoff. The 4-year total tax saving differs by only ₹43,200 — the missed Year-1 depreciation does land eventually — but the time value of that ₹2 lakh delivered in Year 1 versus deferred across Years 2 to 4 is what drives the IRR delta on the project.

If the buyer is a manufacturer and Section 32(1)(iia) additional depreciation is available, Scenario A’s Year-1 deduction rises to ₹24 lakh (40% + 20% additional) for a tax saving of ₹6 lakh — and Scenario B’s Year-1 deduction rises to ₹12 lakh (20% half-rate base + 10% half-rate additional) for a tax saving of ₹3 lakh. The full-versus-half delta widens to ₹3 lakh of Year-1 cash tax. This is the strongest single argument for hitting the 30 September commissioning date on any manufacturer-owned captive solar plant.

Fast tip. If your project realistically cannot commission before 30 September of the target FY, defer commissioning to after 1 April of the next FY rather than commissioning in October. The 5-month delay costs generation revenue but recovers the full 40% Year-1 AD — the net NPV outcome is usually positive for any plant above 75 kW capacity.

MAT and ICDS Implications

The Year-1 AD reduces taxable income under normal computation, but companies remain liable for Minimum Alternate Tax (MAT) at 15% of book profit under Section 115JB of the Income Tax Act. Book profit is computed under Companies Act, 2013 depreciation rates — for a solar plant, that is straight-line at approximately 6.33% per year over a 25-year useful life. So in Year 1, your tax-book depreciation is ₹16 lakh (40% AD on a ₹40 lakh plant) while your book depreciation is only ₹2.53 lakh. Book profit stays much higher than tax profit, and MAT can therefore exceed normal tax for assessees with large AD claims relative to their book profit.

In this illustrative case, normal tax (₹8.5 lakh) exceeds MAT (₹7.12 lakh), so the company pays normal tax and the full AD shield lands directly. For very large AD claims relative to book profit, MAT can exceed normal tax — in which case the company pays MAT and earns MAT credit equal to the difference, carried forward for 15 years under Section 115JAA. The MAT credit is recovered in later years when normal tax exceeds MAT. The net cash benefit of AD survives MAT in most cases, but the timing is delayed, which is why NPV-discounted modelling should drive the decision.

The Section 115BAA regime (22% base, no MAT) and Section 115BAB (15% base, no MAT for new manufacturers) eliminate MAT entirely. Companies that have opted into Section 115BAA can still claim the 40% solar AD under Section 32(1)(ii), but they forfeit Section 32(1)(iia) additional depreciation. The trade-off — MAT relief versus additional depreciation — is project-specific; our finance team runs it for every CAPEX engagement above ₹2 crore.

ICDS — the Income Computation and Disclosure Standards — under Section 145(2) ensures alignment between accounting depreciation and tax depreciation disclosures. For solar, ICDS V (Tangible Fixed Assets) governs the recognition of the asset and the depreciation flow-through. ICDS V requires that the actual cost of a tangible fixed asset include purchase price plus any cost directly attributable to bringing the asset to its working condition for its intended use — covering installation, commissioning, professional fees, and pre-operative interest where applicable. The Institute of Chartered Accountants of India (ICAI) Guidance Note on ICDS (latest 2024 edition) is the canonical reference; your CA should be working from that document. ICDS IX (Borrowing Costs) applies if the plant was loan-funded and interest was capitalised before commissioning.

The tax-book reconciliation is documented in Schedule ICDS of ITR-6. Skipping the Schedule ICDS lines triggers a defective-return notice under Section 139(9) — administrative pain but easily avoided. The Form 3CD clause 13 disclosures on ICDS adjustments are also required at the tax audit stage under Section 44AB.

Common AD Mistakes by Solar Buyers

Across the commercial and industrial CAPEX projects we have supported through 2024–25, the AD-claim errors below recur with painful regularity. Each one is a real disallowance trigger; each one is preventable with a 45-minute pre-filing review by the project finance team plus the buyer’s CA. The first three are the highest-frequency errors; numbers 4 to 7 are higher-impact but lower-frequency.

1. 1
   Claiming the full 60% (40% + 20% additional) without verifying Section 32(1)(iia) eligibility. The additional 20% is available only to manufacturers and only on new plant. Trading, service, and IT businesses are excluded. Power generation businesses are excluded unless they specifically qualify under the captive-use exception. We see this error every year on the desks of CAs who have not been briefed on the actual business activity of the assessee.
2. 2
   Claiming full 40% Year-1 when the plant was commissioned after 1 October. The proviso to Section 32(1) halves the rate to 20% in Year 1. This is the highest-frequency AD error in commercial solar audits and the single most defendable disallowance. The commissioning certificate date, the DISCOM net-meter installation report, and the first generation reading are the three documents the assessing officer will demand to verify the 180-day test.
3. 3
   Failing to net the state capital subsidy against the depreciable base. Explanation 10 to Section 43(1) requires netting. For commercial buyers under Rajasthan, Gujarat, or Maharashtra capital subsidy schemes, the subsidy reduces the cost on which AD is computed. Failure to net is a direct disallowance and the calculation must appear in the tax audit workpapers.
4. 4
   Treating invoice date or payment date as the capitalisation date. The "put to use" doctrine, established by long-standing judicial precedent, fixes the capitalisation date at actual commissioning — not the purchase order date, the invoice date, or the payment date. Wrong capitalisation date is the second-most common reason for the half-year rule being misapplied in either direction.
5. 5
   Including GST in the depreciable base when Input Tax Credit has been claimed. Section 16 of the Central Goods and Services Tax (CGST) Act bars depreciation on the tax component of an asset where ITC is taken. The [Central Board of Indirect Taxes and Customs (CBIC) GST portal](https://cbic-gst.gov.in/) carries the live wording. Dual benefit — ITC plus AD on the same GST — is a clean disallowance.
6. 6
   Claiming AD on an OPEX or Power Purchase Agreement (PPA) plant. AD is available only to the asset owner. Under an Operational Expenditure (OPEX) or PPA route, the developer owns the system and you only pay for the power consumed. Claiming AD here is a misstatement and will be reversed with interest under Section 234B. Confirm asset ownership in the EPC contract before booking any AD claim.
7. 7
   Missing Schedule ICDS reconciliation in ITR-6. ICDS V (Tangible Fixed Assets) requires explicit reconciliation between book and tax depreciation in the Income Tax Return (ITR). Skipping the Schedule ICDS lines triggers a defective-return notice under Section 139(9). The ICAI Guidance Note on ICDS is the authoritative reference.

The institute publishing the most-cited guidance on these issues is the Institute of Chartered Accountants of India (ICAI), whose Guidance Note on Tax Audit (latest 2024 edition) covers Form 3CD clause 18 disclosures on depreciation. Your CA should be working from that guidance.

40% Full Year vs 25% Half-Year — Pros, Cons, Verdict

The 40%-versus-25% decision is not really a choice — it is a timing outcome. No buyer would consciously elect the half-year rate. But the practical question CFOs face is whether to push the EPC contractor for an aggressive 30 September commissioning milestone (with the construction-risk premium that implies) or to accept a relaxed October–November commissioning date. The trade-off is between Year-1 cash tax saved and EPC project-execution risk.

Verdict. For any commercial or industrial CAPEX solar project of 50 kW or larger, the 40% full-year AD path is decisively superior wherever the EPC schedule can credibly hit 30 September commissioning. The Year-1 cash tax delta — ₹4 lakh per 100 kW at 25% slab, ₹6 lakh per 100 kW if Section 32(1)(iia) additional depreciation also applies — vastly outweighs the marginal EPC execution premium of holding to a tighter milestone. If the schedule realistically cannot land 30 September commissioning, defer commissioning past 31 March to the next FY rather than commissioning in October. The 5-month delay costs generation revenue but recovers the full 40% Year-1 AD with positive NPV for any plant above 75 kW. Full mechanics in our accelerated depreciation solar tax guide.

AD Eligibility Matrix by Entity and Use

The matrix above reads quickly: most commercial and industrial CAPEX buyers fall in rows 1, 2, or 4, and the 40% base rate is universally available. The additional 20% is the high-value bump that depends on the manufacturer characterisation and the chosen tax regime.

How Heaven Green Energy Structures Capitalisation for Max AD

Heaven Green Energy operates as a turnkey EPC provider for commercial and industrial CAPEX solar across India, with deep experience supporting the AD claim process from the buyer’s side. The capitalisation structure we ship with every commercial commissioning is built specifically to maximise the AD-claim defensibility while landing the 40% Year-1 rate cleanly:

• Commissioning milestone hard-locked at 25 September for any FY-end-targeted CAPEX project, giving a 5-day buffer before the 30 September cutoff for the half-year rule. This is engineered into the EPC programme from the kick-off meeting.
• Invoice and commissioning certificate dates aligned — the EPC tax invoice is dated to match the chartered engineer’s commissioning certificate, removing the most common timing disconnect that triggers half-year-rule disputes at audit.
• Line-itemised tax invoice with Harmonised System of Nomenclature (HSN) codes, GST breakup, and capitalisable cost split (modules, inverter, structure, balance-of-system, civil, installation, commissioning, professional fees) — directly usable in the fixed asset register and Form 3CD without rework.
• Chartered engineer commissioning certificate as standard — confirming capacity in kilowatt (kW), panel and inverter serial numbers, commissioning date, and that the plant is generating electricity. This is the primary “put to use” evidence under the proviso to Section 32.
• DISCOM net-meter installation report — for grid-connected systems, the bi-directional meter installation report corroborates the commissioning date and confirms grid synchronisation.
• Captive-consumption use certificate for industrial buyers — documenting that the solar plant supplies the manufacturing process, supporting the Section 32(1)(iia) additional depreciation eligibility.
• State subsidy netting calculation under Explanation 10 to Section 43(1) — pre-prepared in spreadsheet form for the CA, showing exactly how any state capital subsidy is netted against the depreciable base.
• MAT and Section 115BAA trade-off model — a project-specific spreadsheet quantifying the AD shield under both the old regime (with Section 32(1)(iia)) and the new regime (without), enabling a clean tax-regime election decision.
• Multi-year depreciation schedule — Year-1 through Year-25 WDV roll-forward with MAT credit accrual and recovery, and ICDS V reconciliation lines, handed directly to the CA in spreadsheet form.

Our commercial and industrial portfolio includes pharmaceutical plants, cold-chain warehouses, textile units, and engineering Micro, Small and Medium Enterprises (MSMEs) across northern and western India — each with a documented AD claim trail that has survived multiple Section 143(3) scrutiny notices.

Explore the services aligned to your business profile:

• Commercial Solar — 10–500 kW rooftop systems with full 40% AD support, CAPEX modelling, and audit-ready documentation.
• Industrial Solar — 500 kW to 10 MW ground-mount and rooftop with captive-consumption certification and open access integration.
• Solar EPC Services — turnkey delivery, performance guarantee, and full Form 3CD documentation pack.
• Contact our commercial team — free CAPEX feasibility, 40%-vs-25% AD impact model, and commissioning-milestone scheduling within 48 hours.

Frequently Asked Questions

What is the difference between 40% AD and 25% AD on solar in 2026?

The 40% Accelerated Depreciation rate is the statutory Year-1 WDV rate for solar under Section 32(1)(ii) of the Income Tax Act read with Appendix I Block 8(ix)(l). The “25% AD” outcome refers to the half-year-rule result under the proviso to Section 32(1): when a solar plant is put to use for fewer than 180 days in the year of acquisition (commissioned after 1 October of the financial year), the rate is halved to 20%, and when blended with part-rated additional depreciation under Section 32(1)(iia), the effective Year-1 deduction lands near 25% to 30%. The full 40% is captured only when commissioning lands on or before 30 September of the FY.

How does the half-year rule apply to solar Accelerated Depreciation?

The proviso to Section 32(1) of the Income Tax Act halves the depreciation rate for any asset put to use for fewer than 180 days in the year of acquisition. For a FY running 1 April to 31 March, the 180-day threshold lands on approximately 30 September. A solar plant commissioned on or before 30 September captures the full 40% Year-1 rate. A plant commissioned on or after 1 October captures only 20% in Year 1, with the missing 20% deferring into Years 2 onwards via the higher residual WDV. The missed depreciation is not lost, but the time-value-of-money cost is real and avoidable.

Can I claim the Section 32(1)(iia) additional 20% depreciation on a solar plant?

Yes, if you are an assessee engaged in the manufacture or production of articles or things and the solar plant is used for captive consumption in that manufacturing business. The additional 20% under Section 32(1)(iia) is a one-time Year-1 bump on top of the normal 40% — stacking the effective Year-1 rate to 60% of the original cost. It is not available to pure trading, service, IT businesses, or to independent solar developers selling power. Assessees who have migrated to the Section 115BAA regime (22% base, no MAT) also forfeit Section 32(1)(iia). The half-year rule cuts the additional 20% to 10% when commissioning lands after 1 October.

What is the actual cash tax saving difference between 40% and 25% AD on a 100 kW solar plant?

For a 100 kW commercial solar plant at ₹40 per watt (total cost ₹40,00,000) under the post-2024 corporate tax regime at 25% effective rate: the 40% full-year AD path delivers ₹16 lakh of Year-1 deduction and ₹4 lakh of cash tax saved. The 20% half-year-rule path delivers ₹8 lakh of Year-1 deduction and ₹2 lakh of cash tax saved. The Year-1 cash delta is ₹2 lakh. For a manufacturer eligible for Section 32(1)(iia) additional 20%, the Year-1 cash delta widens to ₹3 lakh because the additional depreciation is also halved under the proviso.

Does MAT (Section 115JB) eliminate the benefit of 40% AD on solar?

No, MAT delays but does not eliminate the AD benefit. Minimum Alternate Tax at 15% of book profit is calculated under Section 115JB independently of the normal computation. If MAT exceeds normal tax in the AD year, the company pays MAT and earns MAT credit equal to the difference, carried forward for 15 years under Section 115JAA and recovered when normal tax exceeds MAT in later years. The net cash benefit of the AD shield survives MAT in NPV terms for most commercial buyers. Companies that have elected Section 115BAA (22% base, no MAT) bypass this complexity entirely while still claiming the 40% solar AD under Section 32(1)(ii).

Does the 40% AD rate apply to the GST portion of the solar plant cost?

Yes, but only if Input Tax Credit (ITC) on that GST has not been claimed under the CGST Act. For most rooftop commercial solar in 2026, ITC is restricted under Section 17(5) of the CGST Act, so the GST sits inside the depreciable base and AD applies to the GST-inclusive cost. The CBIC GST portal carries the live restriction language. Where ITC is available and claimed, exclude the GST from the depreciable base. Claiming both ITC and AD on the same GST amount is dual benefit and will be reversed with interest at audit.

How long does unabsorbed AD carry forward under Section 32(2)?

Under Section 32(2) of the Income Tax Act, unabsorbed depreciation — including 40% AD that exceeds Year-1 taxable income — carries forward indefinitely until fully set off against future business or other income. This is unlike business loss under Section 72, which is limited to eight assessment years. The indefinite carry-forward makes solar AD a long-life tax asset on the books, particularly useful for cyclical businesses with intermittent profitable years. For startups with multi-year losses, the AD is preserved on the balance sheet and consumed against profits in later years.

Can an LLP or partnership firm claim the 40% solar AD?

Yes, Section 32 of the Income Tax Act applies to all assessees carrying on business or profession, including Limited Liability Partnerships (LLPs), partnership firms, sole proprietorships, and companies. The 40% Year-1 AD rate under Appendix I Block 8(ix)(l) is identical across these entity types. The differences are at the entity-level tax rate (LLP at 30% plus surcharge and cess, partnership firm at 30% plus surcharge and cess, private limited at 25%-25.17%-30% depending on regime) and at partner-level deduction flow-through. The plant must be owned by the entity and used for the entity’s business in its own name.

Does Heaven Green Energy align commissioning dates to capture full 40% AD?

Yes — for any commercial or industrial CAPEX project where the buyer’s finance team confirms a FY-end AD-claim target, Heaven Green Energy hard-locks the commissioning milestone at 25 September, providing a 5-day buffer before the 30 September half-year-rule cutoff. The EPC programme is engineered backward from that milestone, with construction kick-off typically in June or early July to absorb monsoon-clearance risk. Every commissioning ships with a dated chartered engineer certificate, the DISCOM net-meter installation report, and the line-itemised tax invoice — the three documents that defend the 180-day “put to use” test at any Section 143(3) scrutiny. Request the AD-aligned EPC schedule.