Accelerated depreciation can be a useful tax incentive because it permits companies to defer payment of corporate income taxes by reducing the amount of taxable income each year. This in turn results in increased cash flow, encouraging companies to purchase more assets.
Example: Ms. Ankita runs a factory which consumes 15,000 units (KWH of electricity on a monthly basis, at current industrial rates in Maharashtra, she has to pay ( 15,000 X 8) Rs. 1,20,000/- in electricity bills every month(Rs 8 being the tariff.) For generating 15,000 units a 100KWp SPGS which costs 70 lacs is required for Ms Ankita’s Factory.
Upon Installation not only can she avail savings from lower electricity bills but she is also entitled to accelerated depreciation.
Break Down of Accelerated Depreciation
Cost of System: 70 Lacs
– Year 1: 80% 0f 70 Lacs = 56 Lacs
Considering the average tax rate at 34%. Ms. Ankita is entitled to (34% of 56 lacs)Rs. 19,04,000/- in tax rebate in the 1st Year
Considering an instance where Ms. Ankita is liable to pay Rs. 25 lacs as Income Tax for the year, taking into account accelerated depreciation, Ms ankita only has to Pay (25,00,000 – 19,04,000) Rs. 5,96,000
in taxes instead of 25 Lacs.
– Year 2: 20% 0f 70 Lacs = 14 lacs
Average tax@ 34% gives = 4,76,000 in tax rebate in the 2nd Year
Considering an instance where Ms. Ankita is liable to pay Rs. 25 lacs as Income Tax for the year, taking into account accelerated depreciation Ms. Ankita only has to Pay (25,00,000 – 4,76,000) Rs. 20,24,000 in taxes instead of 25 lacs.
||Depreciation Benefit (Rs)
||Total system cost
With the Accelerated Depreciation benefit from the government, the savings from SPGS will not just be in terms of electricity bills but also tax rebate. Simply put commercial SPGS installations allow savings of 34% of the cost of project in the form of tax rebate (accelerated depreciation) to the plant owner. This is what is creating major interests for investors to divert their money into the solar market compared to others.
Advantages of Investment in Solar
- Low Payback period
The Break Even Point (BEP) of any solar power plant is around 3 to 4 years, after which a long & stable income is generated for a period of 25 years. In both the above example, the payback for Ms.Ankita is 3 Years taking AD into consideration.
- Increase Your Property Value
Solar panels will increase a property attractiveness on the market, similarly to properties with low property taxes, homes in school districts and homes with good Home Energy Ratings (a measurement of a energy efficiency). A study conducted by National Renewable Energy Laboratory (NREL) concluded that homes with solar panels sell 20% faster and for 17% more money.
- Secure Investment:
The utility companies are notorious for their fluctuating and unreliable electricity prices. There is clearly an upward trend with the evident rise in electricity cost.With solar panels and simple math, we can calculate how much electricity will be generated, and most importantly, at what price, for at least the next 25 years (fixed energy costs).
- Guaranteed Performance :
Solar panel manufacturers include a 25- 30 year warranty (also known as a performance guarantee) with their solar panels. The industry standard guarantees 80% performance after 25 years. The real lifespan of solar panels is much longer your solar panels will likely generate a good amount of electricity 30-40 years down the line.