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Understanding the return on investment for a solar system is not as simple as dividing cost by annual savings. A proper solar ROI calculation accounts for subsidies, degradation, tariff escalation, maintenance costs, and the time value of money. This step-by-step guide walks you through exactly how to calculate your solar returns — the same methodology used by our solar savings calculator.
Step 1: Determine Your System Cost
The starting point is the total installed cost of your solar system before any subsidies.
Current pricing in Tamil Nadu (2026)
| System Size | Approximate Cost per kW | Total System Cost |
|---|---|---|
| 1 kW | Rs 55,000–60,000 | Rs 55,000–60,000 |
| 2 kW | Rs 50,000–55,000 | Rs 1,00,000–1,10,000 |
| 3 kW | Rs 45,000–50,000 | Rs 1,35,000–1,50,000 |
| 5 kW | Rs 42,000–48,000 | Rs 2,10,000–2,40,000 |
| 10 kW | Rs 40,000–45,000 | Rs 4,00,000–4,50,000 |
These are all-inclusive prices covering panels, inverter, mounting structure, wiring, installation, TANGEDCO liaison, and net metering setup.
Important: Prices vary based on panel brand (Tier-1 vs. Tier-2), inverter type (string vs. micro), and installation complexity (flat roof vs. sloped, ground floor vs. multi-storey). Always get itemised quotes.
Step 2: Subtract the Subsidy
Under the PM Surya Ghar Muft Bijli Yojana, residential consumers in Tamil Nadu are eligible for central government subsidies:
| System Size | Subsidy Amount |
|---|---|
| Up to 2 kW | Rs 30,000 per kW (max Rs 60,000) |
| 2–3 kW | Rs 30,000 per kW for first 2 kW + Rs 18,000 per kW for remaining (max Rs 78,000) |
| Above 3 kW | Capped at Rs 78,000 |
Calculate your net investment
Example — 3 kW residential system:
- System cost: Rs 1,45,000
- Subsidy: Rs 78,000
- Net investment: Rs 67,000
Note: The subsidy is available only for residential (domestic) connections. Commercial and industrial installations do not qualify but can claim accelerated depreciation instead.
Step 3: Estimate Annual Generation
Your system's annual electricity generation depends on location, orientation, tilt angle, and shading.
Generation estimate formula
Annual generation = System capacity (kW) x CUF x 365 x 24
CUF (Capacity Utilisation Factor) for Tamil Nadu rooftop solar:
| Region | Typical CUF | Annual Generation per kW |
|---|---|---|
| Coimbatore/Tirupur | 16–18% | 1,400–1,575 units |
| Chennai | 15–17% | 1,315–1,490 units |
| Madurai/Trichy | 16.5–18.5% | 1,445–1,620 units |
| Salem/Erode | 16–18% | 1,400–1,575 units |
Example — 3 kW system in Coimbatore:
- Annual generation: 3 x 1,475 (average) = 4,425 units per year
Step 4: Calculate Annual Savings
This is where the TANGEDCO tariff structure becomes critical. Your savings per unit depend on which slab you are currently in and which slab solar drops you to.
The slab-drop multiplier effect
Tamil Nadu's whole-slab billing means solar savings are not linear. A small reduction in consumption can cause a large drop in your per-unit rate.
Example — household consuming 600 units bi-monthly (without solar):
- Without solar: 600 x Rs 4.00 + Rs 120 = Rs 2,520 per bi-month
- With 3 kW solar (generating ~740 units bi-monthly), net consumption drops to ~260 units
- With solar: 260 x Rs 2.00 + Rs 70 = Rs 590 per bi-month
- Bi-monthly savings: Rs 1,930
- Annual savings: Rs 11,580
Notice that the 740 units of solar generation saved Rs 11,580 per year. That is an effective value of Rs 2.60 per unit — but the real value is higher because without solar, you were paying Rs 4.00 per unit. The slab drop is where the magic happens.
For households in higher slabs (800+ units bi-monthly), the savings per solar unit can exceed Rs 4–5 due to the slab-drop effect.
Step 5: Account for Panel Degradation
Solar panels lose efficiency over time. Standard warranties guarantee no more than 0.5–0.7% annual degradation. For ROI calculations, use 0.5% per year as a conservative estimate.
| Year | Generation (% of Year 1) | Annual Units (3 kW, Coimbatore) |
|---|---|---|
| Year 1 | 100% | 4,425 |
| Year 5 | 98% | 4,337 |
| Year 10 | 95.1% | 4,208 |
| Year 15 | 92.3% | 4,084 |
| Year 20 | 89.5% | 3,960 |
| Year 25 | 86.9% | 3,845 |
Even at Year 25, the system is producing 87% of its original output — still highly productive and saving money.
Step 6: Factor in Tariff Escalation
TANGEDCO tariffs have historically increased 3–6% every few years. For a conservative ROI calculation, assume a 3% annual escalation in grid electricity costs.
This means your savings grow every year even as your generation slightly declines:
| Year | Grid Tariff (per unit, effective) | Annual Savings |
|---|---|---|
| Year 1 | Rs 4.00 | Rs 11,580 |
| Year 5 | Rs 4.50 | Rs 13,400 |
| Year 10 | Rs 5.22 | Rs 15,800 |
| Year 15 | Rs 6.05 | Rs 18,600 |
| Year 20 | Rs 7.01 | Rs 21,900 |
Cumulative savings over 25 years: Rs 4.5–5.5 lakhs (for a 3 kW system with Rs 67,000 net investment).
Step 7: Include Maintenance Costs
A realistic ROI calculation includes ongoing maintenance:
| Maintenance Item | Frequency | Annual Cost |
|---|---|---|
| Panel cleaning | Quarterly | Rs 500–1,500 |
| Annual inspection | Yearly | Rs 1,000–2,000 |
| Inverter replacement | Once (Year 10–12) | Rs 25,000–40,000 (amortised) |
| Minor repairs | As needed | Rs 500–1,000 average |
Total annual maintenance: Rs 3,000–5,000 (including amortised inverter replacement).
Subtract this from your annual savings to get net annual benefit.
Step 8: Calculate Simple Payback Period
Simple payback = Net investment / Annual net savings
Example — 3 kW residential system:
- Net investment: Rs 67,000
- Year 1 net savings: Rs 11,580 - Rs 3,000 (maintenance) = Rs 8,580
- Simple payback: 67,000 / 8,580 = 7.8 years
After the payback period, every unit of solar electricity is essentially free for the remaining 17+ years of system life.
Step 9: Calculate Net Present Value (NPV)
For a more sophisticated analysis, calculate the NPV of your solar investment using a discount rate that reflects your cost of capital.
NPV = Sum of [Annual net savings / (1 + discount rate)^year] - Initial investment
Using a 10% discount rate:
| Period | Undiscounted Net Savings | Present Value (10% discount) |
|---|---|---|
| Years 1–5 | Rs 45,000 | Rs 37,500 |
| Years 6–10 | Rs 58,000 | Rs 39,200 |
| Years 11–15 | Rs 72,000 | Rs 38,800 |
| Years 16–20 | Rs 88,000 | Rs 37,500 |
| Years 21–25 | Rs 1,05,000 | Rs 35,200 |
| Total | Rs 3,68,000 | Rs 1,88,200 |
NPV = Rs 1,88,200 - Rs 67,000 = Rs 1,21,200
A positive NPV means your solar investment creates real wealth beyond your cost of capital. An NPV of Rs 1.2 lakhs on a Rs 67,000 investment is an excellent return.
Step 10: Calculate Internal Rate of Return (IRR)
The IRR is the discount rate at which the NPV equals zero. For residential solar in Tamil Nadu with subsidy:
- Typical IRR: 18–28% depending on system size and consumption slab
- For high-consumption households (800+ units bi-monthly): 25–35%
- For commercial installations with accelerated depreciation: 30–45%
Compare this to fixed deposits (6–7%), mutual funds (12–15%), or real estate (8–12%). Solar consistently offers one of the highest risk-adjusted returns available.
Quick Reference: ROI by System Size
| System Size | Net Cost (after subsidy) | Annual Savings | Payback | 25-Year Returns |
|---|---|---|---|---|
| 2 kW | Rs 40,000–50,000 | Rs 6,000–9,000 | 5–7 years | Rs 2–3 lakhs |
| 3 kW | Rs 60,000–75,000 | Rs 9,000–14,000 | 5–8 years | Rs 3.5–5 lakhs |
| 5 kW | Rs 1,30,000–1,60,000 | Rs 15,000–22,000 | 7–9 years | Rs 5.5–8 lakhs |
| 10 kW | Rs 3,20,000–3,70,000 | Rs 30,000–45,000 | 8–10 years | Rs 10–15 lakhs |
Try Our Calculator
These calculations involve many variables specific to your situation — your exact consumption, tariff slab, location, roof orientation, and financing approach. Our solar savings calculator automates this entire process and gives you a personalised ROI analysis in minutes.
For a detailed financial analysis including tax benefits, depreciation schedules, and financing comparisons, contact our team for a consultation. We will provide a comprehensive proposal with year-by-year projections specific to your property and consumption pattern.
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