As per Union Budget 2016-17, GoI has proposed to cap the higher rate of depreciation at 40% which is 50% of the existing depreciation rate. It will be with effect from April 1, 2017. Let’s understand the same with the help of an example: Assumptions: 1. Cost of solar power project: Rs. 120 lacs. 2. Tax rate: 33.06% 3. Depreciation rate till 31st March 2017 : 80% 4. Depreciation rate w.e.f 1st April 2017: 40% 5. Additional depreciation rate as per section 32(1)(iiA) of Income Tax Act of 1961: 20% We will observe four scenarios as mentioned below (see table).
As observed in the table above, due to a proposed cap on the rate of depreciation, the benefit that was available to the investor till date will now be halved in the first year and spread over the subsequent years. Though, this has been considered as a setback to the renewable sector, it has not affected much the viability of the solar power systems. The investor can still expect a payback of 4-5 years for an investment in solar power generation systems. Hence, we can safely say that solar power will still remain as an attractive investment in the coming financial y