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For businesses — whether a manufacturing unit in SIPCOT Coimbatore, a textile mill in Tirupur, a hotel in Chennai, or a commercial complex in Madurai — rooftop solar is not just an electricity cost reduction measure. It is a tax-efficient capital investment that offers accelerated depreciation, concessional GST, and dramatically improves the return on investment. This guide explains how Indian tax law treats solar investments, with worked examples that show the real financial impact.
40% Accelerated Depreciation on Solar Systems
The single most impactful tax benefit for business solar installations is accelerated depreciation under the Income Tax Act.
What Is Accelerated Depreciation?
Under Section 32(1)(iia) of the Income Tax Act, the Government of India allows businesses to claim 40% depreciation on the cost of solar power generation equipment in the first year of installation. This is in addition to the normal depreciation rate, effectively allowing businesses to write off a large portion of the solar investment against taxable income in year one.
Normal depreciation rate for solar equipment: 15% (under the Plant and Machinery block) Accelerated depreciation (additional): 40% in the first year
This means in the first year, you can claim 40% of the total solar system cost as depreciation, and the remaining balance is depreciated at 15% per year using the Written Down Value (WDV) method.
Who Can Claim Accelerated Depreciation?
- Eligible: Companies (private/public), LLPs, partnership firms, proprietorship businesses — any entity with business income that can claim depreciation
- Not eligible: Individual residential consumers (salaried individuals), HUFs without business income, entities in the presumptive taxation scheme (Section 44AD/44ADA)
- Condition: The solar system must be used for the purpose of business or profession. A system installed on a factory, warehouse, office, or commercial establishment qualifies. A system installed on the owner's personal residence does not — even if the owner is a business person
Worked Example: 100 kW Commercial Solar System
| Parameter | Value |
|---|---|
| System capacity | 100 kW |
| Total installed cost | ₹45,00,000 |
| Business tax bracket | 25% (for companies with turnover under ₹400 crore) |
Year 1 Depreciation Calculation:
| Depreciation Component | Amount |
|---|---|
| Accelerated depreciation (40% of ₹45,00,000) | ₹18,00,000 |
| Total Year 1 depreciation | ₹18,00,000 |
| Tax savings (25% of ₹18,00,000) | ₹4,50,000 |
Remaining WDV after Year 1: ₹45,00,000 - ₹18,00,000 = ₹27,00,000
Year 2 onwards: Normal depreciation at 15% on WDV:
- Year 2: 15% of ₹27,00,000 = ₹4,05,000 (tax saving: ₹1,01,250)
- Year 3: 15% of ₹22,95,000 = ₹3,44,250 (tax saving: ₹86,063)
- And so on...
Total tax savings over the life of the system: Approximately ₹11,25,000 (25% of the total system cost, recovered faster through accelerated depreciation)
The key advantage of accelerated depreciation is time value of money — you recover a larger portion of the tax benefit upfront rather than spread over 15+ years.
GST on Solar Panels and Systems
Solar equipment enjoys concessional GST rates in India:
| Component | GST Rate |
|---|---|
| Solar panels/modules | 12% |
| Solar inverters | 12% |
| Solar mounting structures | 18% |
| Solar batteries (lithium-ion) | 18% |
| Solar EPC/installation service (composite supply) | 12% on 70% (deemed goods portion) |
| Complete solar power generating system (as a package) | 12% |
Important clarification: When you purchase a complete solar system as a turnkey package (which is how most rooftop installations are sold), the entire package attracts 12% GST. This is significantly lower than the 18% standard rate that applies to most goods and services.
For businesses registered under GST, the input tax credit (ITC) on the solar system purchase can be claimed against your GST output liability, effectively recovering the GST paid. However, note that ITC on solar systems used for personal purposes (e.g., director's residence) is not available under Section 17(5).
Tax Savings Calculation: Multiple Scenarios
Scenario 1: Small Business — 10 kW System
| Parameter | Value |
|---|---|
| System cost | ₹4,50,000 |
| Tax bracket (proprietorship, 30% slab) | 30% + cess |
| Year 1 depreciation (40%) | ₹1,80,000 |
| Year 1 tax saving | ₹55,800 (31% effective rate) |
| Annual electricity savings | ₹1,08,000 |
| Effective system cost (after Year 1 tax + annual savings) | ₹2,86,200 |
| Payback period | 2.6 years |
Scenario 2: Medium Business — 50 kW System
| Parameter | Value |
|---|---|
| System cost | ₹22,50,000 |
| Tax bracket (company, 25%) | 25% + cess |
| Year 1 depreciation (40%) | ₹9,00,000 |
| Year 1 tax saving | ₹2,34,000 (26% effective rate) |
| Annual electricity savings | ₹5,40,000 |
| Effective system cost (after Year 1 tax + annual savings) | ₹14,76,000 |
| Payback period | 2.7 years |
Scenario 3: Industrial Unit — 500 kW System
| Parameter | Value |
|---|---|
| System cost | ₹2,00,00,000 |
| Tax bracket (company, 25%) | 25% + cess |
| Year 1 depreciation (40%) | ₹80,00,000 |
| Year 1 tax saving | ₹20,80,000 |
| Annual electricity savings | ₹48,00,000 |
| Effective system cost (after Year 1 tax + annual savings) | ₹1,31,20,000 |
| Payback period | 2.7 years |
The pattern is clear: For businesses in the 25–30% tax bracket, accelerated depreciation combined with electricity savings brings the effective payback period to under 3 years — dramatically better than the 4–5 year payback for residential systems without tax benefits.
Commercial Solar ROI with Tax Benefits
Let us look at the complete 10-year return for a 100 kW commercial system:
| Year | Electricity Savings | Tax Savings (Depreciation) | Total Annual Benefit |
|---|---|---|---|
| 1 | ₹10,80,000 | ₹4,50,000 | ₹15,30,000 |
| 2 | ₹11,34,000 | ₹1,01,250 | ₹12,35,250 |
| 3 | ₹11,91,000 | ₹86,063 | ₹12,77,063 |
| 4 | ₹12,50,000 | ₹73,153 | ₹13,23,153 |
| 5 | ₹13,13,000 | ₹62,180 | ₹13,75,180 |
| 6–10 | ₹72,00,000 (cumulative) | ₹2,15,000 (cumulative) | ₹74,15,000 |
| 10-Year Total | ₹1,31,68,000 | ₹9,87,646 | ₹1,41,55,646 |
10-year ROI on ₹45,00,000 investment: 314% — and the system continues generating returns for another 15+ years.
Industrial Solar Payback with Depreciation
For HT industrial consumers paying ₹6–₹7 per unit plus demand charges, the payback is even faster:
| System Size | Investment | Year 1 Tax Saving | Annual Electricity Saving | Payback Period |
|---|---|---|---|---|
| 100 kW | ₹42,00,000 | ₹4,37,000 | ₹10,80,000 | 2.5 years |
| 250 kW | ₹1,00,00,000 | ₹10,40,000 | ₹27,00,000 | 2.4 years |
| 500 kW | ₹1,90,00,000 | ₹19,76,000 | ₹54,00,000 | 2.3 years |
| 1 MW | ₹3,60,00,000 | ₹37,44,000 | ₹1,08,00,000 | 2.2 years |
Large industrial installations achieve payback in as little as 2 years when combining electricity savings with tax benefits.
Documentation Required for Claiming Depreciation
To claim accelerated depreciation on your solar system, maintain the following documentation:
- Tax invoice from the solar installer/EPC company showing the complete system cost, GST, and HSN codes
- Commissioning certificate from TANGEDCO (for grid-connected systems) or from the installer (for off-grid)
- Asset addition entry in your books of accounts, classifying the solar system under "Plant and Machinery"
- Depreciation schedule prepared by your CA, showing the accelerated depreciation claim
- Proof of business use — the system must be installed at a business premises, not a personal residence
- Net metering agreement with TANGEDCO (evidence that the system is operational and connected)
- Insurance policy (if applicable) — for large systems, insurance documentation supports the asset value claim
CA Perspective: How to File
From a practical filing standpoint:
In ITR Filing
- Claim depreciation under Schedule DPM (Depreciation on Plant and Machinery) in the income tax return
- Classify the solar system under Block of Assets: Plant and Machinery with the applicable depreciation rate
- For the first year, apply the 40% accelerated depreciation rate
- From the second year onwards, apply the 15% normal rate on the Written Down Value (WDV)
Important Tax Filing Notes
- The solar system must be put to use for at least 180 days in the financial year to claim full first-year depreciation. If installed in the second half of the year (after September), only 50% of the first-year depreciation is available
- Timing tip: Install your solar system before September 30 of the financial year to claim the full 40% accelerated depreciation in that year
- If the system is sold within the depreciation period, the sale proceeds are deducted from the block value, and any short-term capital gain is taxed accordingly
- Maintain a separate depreciation sub-block for the solar system to track the accelerated depreciation claim clearly
Common Mistakes in Tax Filing
- Claiming depreciation on a residential system — only business-use systems qualify
- Claiming both subsidy and full depreciation — if you receive any government subsidy, the depreciable value is the system cost MINUS the subsidy amount
- Not maintaining commissioning proof — the tax officer may request evidence that the system was operational in the claimed year
- Incorrect HSN code classification — ensure the invoice uses the correct solar equipment HSN codes (8541.40 for panels, 8504.40 for inverters)
Planning a commercial or industrial solar installation in Tamil Nadu? Tristar Green Energy Solutions provides complete tax-compliant documentation, itemised invoices with correct HSN codes, and commissioning certificates that your CA needs for depreciation claims. We serve businesses across Tamil Nadu — from 10 kW office rooftops to multi-MW industrial installations. Contact us for a free commercial solar feasibility assessment, including a tax benefit analysis customised to your business.
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