Quick Facts
What Accelerated Depreciation is
Accelerated Depreciation (AD) is a tax incentive under the Indian Income Tax Act 1961 that allows businesses to claim a high rate of depreciation on solar plant capital cost in the first year of operation. The accelerated rate reduces taxable income, lowering tax payable and effectively reducing the cost of the solar asset to the business.
The current standard rate is 40% in the first year. An additional 20% is allowed if the asset is put to use for more than 180 days in the year of acquisition, taking total first-year depreciation to 60%. Subsequent years follow the standard written-down value (WDV) depreciation method at the prescribed rate.
The mechanism is one of the most important tax incentives for C&I solar adoption in India. For a profitable corporate buyer at 30% tax rate, AD can effectively recover 12% to 18% of solar CAPEX through reduced tax outflow in the first 1 to 2 years.
How AD works
The mechanics involve standard depreciation accounting with an accelerated rate for solar.
In year 1, the business calculates depreciation on the solar plant’s cost basis using the AD rate (40% standard, with 20% additional for second-half commissioning).
The depreciation amount reduces taxable income for the year.
At the corporate tax rate (30% for most), the tax saving equals the depreciation amount multiplied by the tax rate.
In year 2 onward, the WDV depreciation method applies with the prescribed lower rate, reducing the unrecovered cost over the asset’s useful life.
A worked example for a 100 kW commercial rooftop costing Rs 55 lakh, commissioned in October (second half of the financial year):
Year 1 depreciation: Rs 55 lakh multiplied by 60% (40% standard plus 20% additional) = Rs 33 lakh.
Year 1 tax saving at 30% corporate rate: Rs 33 lakh multiplied by 30% = Rs 9.9 lakh.
Net effective cost after Year 1 tax saving: Rs 55 lakh minus Rs 9.9 lakh = Rs 45.1 lakh.
The remaining Rs 22 lakh (Rs 55 lakh minus Rs 33 lakh) becomes the WDV for further depreciation in subsequent years.
AD versus regular depreciation
For a non-solar asset, the standard depreciation rate may be 15% to 25% depending on category. For solar:
Without AD: Year 1 depreciation at 15% (standard for plant and machinery) = Rs 8.25 lakh on Rs 55 lakh.
With AD (40%): Year 1 depreciation = Rs 22 lakh.
With AD (40% plus 20% additional): Year 1 depreciation = Rs 33 lakh.
The accelerated rate is significantly higher, producing significantly larger first-year tax savings. The benefit shifts cash flow forward, improving project NPV and IRR.
AD impact on solar project economics
For a 100 kW commercial rooftop owned by a taxable corporate consumer:
CAPEX: Rs 55 lakh.
Year 1 AD: Rs 33 lakh (60% of CAPEX).
Year 1 tax saving: Rs 9.9 lakh at 30%.
Annual electricity savings: Rs 9 lakh (assumes 1,55,000 kWh annual generation at Rs 5.80 per kWh net of charges).
Year 2 to 25 cumulative electricity savings: Rs 1.8 crore (approximately).
Tax savings on remaining depreciation through asset life: approximately Rs 6 lakh.
Total benefits: Rs 9.9 lakh (Year 1 tax) + Rs 1.8 crore (electricity savings) + Rs 6 lakh (remaining depreciation tax savings) = Rs 1.96 crore.
Payback period without AD: 5 to 6 years.
Payback period with AD: 3.5 to 4.5 years.
The improvement of 1 to 2 years on payback is the standard AD benefit calculation for Indian C&I solar.
Who qualifies for AD
AD requires the entity to be a taxable business with profits that generate tax liability. Specifically:
The entity must be a company, partnership firm, LLP, sole proprietorship, or trust running a business.
The solar asset must be on the entity’s balance sheet (owned, not leased).
The entity must have taxable income to set off depreciation against.
The asset must be put to use for business purposes.
The income tax return must claim the AD properly.
Residential consumers (without business income) cannot claim AD. The benefit primarily applies to commercial and industrial entities, schools, hospitals, and non-residential users with taxable income.
AD and CAPEX versus OPEX models
For a CAPEX solar project (consumer buys the system), the consumer owns the asset and claims AD. The benefit accrues to the consumer.
For an OPEX or RESCO project (developer owns the system and sells power to the consumer), the developer claims AD on the asset. The consumer pays a per-kWh tariff with no AD benefit directly.
This is one reason CAPEX projects often have lower long-term cost for profitable corporate buyers. The AD benefit, available to the asset owner, accelerates payback. In OPEX projects, the developer’s AD benefit is factored into the lower tariff.
AD and MAT considerations
Minimum Alternate Tax (MAT) is a backstop tax to ensure that companies pay at least a minimum tax even if their taxable income is reduced through deductions. MAT applies at 15% of book profit (with surcharge and cess).
When a company claims AD, its taxable income drops significantly but book profit may be largely unchanged. The resulting MAT may exceed the regular income tax, partially offsetting the AD benefit.
MAT paid in excess of regular tax can be carried forward as MAT credit for up to 15 years and adjusted against future tax payable. For long-running businesses, MAT credit recovers part of the benefit over time.
The interaction is complex. Chartered accountants typically handle the AD versus MAT optimisation as part of the company’s overall tax planning.
AD under the new corporate tax regime
The Finance Act 2019 introduced a lower corporate tax rate of 22% (or 15% for new manufacturing) under Section 115BAA, on the condition that the company does not claim certain deductions including additional depreciation.
Companies face a trade-off:
Old regime: 30% corporate tax with AD benefit.
New regime: 22% corporate tax without additional depreciation.
The optimal choice depends on the company’s overall tax position. A company with significant solar CAPEX in a given year may benefit more from the old regime with AD; a company with steady moderate income may benefit from the new regime’s lower rate.
This decision is made annually and applies to the company’s full income, not just the solar transaction.
Common mistakes with AD
Assuming AD is automatically claimed. The tax return must explicitly claim it.
Confusing AD with GST input credit. They are separate provisions under different Acts.
Forgetting the 180-day rule. Only assets put to use for more than 180 days in the year qualify for additional 20% depreciation.
Mismatching the asset’s commissioning date with the financial year. The commissioning timing affects AD eligibility.
Not coordinating AD with overall tax planning. The MAT consideration and the new regime trade-off matter.
Treating AD as recoverable cash. It is a tax deduction; the cash benefit is the tax saved, not the depreciation amount.
Best practices
Plan solar project timelines to align AD claims with the company’s overall tax strategy.
Commission solar projects in the first half of the financial year when feasible, maximising operating days for the additional 20% AD.
Document the asset commissioning date carefully. Tax authorities may scrutinise the date for AD eligibility.
Engage a chartered accountant familiar with renewable energy taxation. The interplay between AD, MAT, GST, and the new corporate tax regime can be subtle.
For OPEX or RESCO deals, ensure the contract correctly assigns AD benefits to the asset owner. Some contracts split or share AD benefits explicitly.
Standards and references
AD is governed by Section 32 of the Income Tax Act 1961 and related rules. MAT is under Section 115JB. The new corporate tax regime is under Section 115BAA. CBDT issues notifications and circulars updating depreciation rates and rules. Chartered Accountants follow ICAI guidelines on accounting treatment.
Related glossary terms
- MAT Credit
- CAPEX Model
- OPEX Model
- Power Purchase Agreement
- GST Input Credit
- IRR
- Payback Period
- TCS on Solar
Key takeaways
Accelerated Depreciation (AD) allows Indian businesses to claim 40% depreciation on solar plant capital cost in the first year (60% with additional 20% for second-half commissioning), under Section 32 of the Income Tax Act. AD significantly improves project economics for taxable corporate buyers, reducing payback period by 1 to 2 years and effectively recovering 12% to 18% of CAPEX through reduced tax outflow. The benefit applies to CAPEX projects where the consumer owns the asset; OPEX and RESCO projects have the AD benefit accrue to the developer. AD interacts with MAT and the new corporate tax regime, requiring careful tax planning.