Tax Exemption on Renewable Energy in India (2023)

Picture this: India, a country steeped in rich history, awash with vibrant cultures, and brimming with unbounded potential. 

Now imagine it stepping into the limelight as a green energy powerhouse. Intriguing, isn’t it?

India’s road to renewable energy isn’t just a story of swapping coal mines for wind turbines and solar panels.

It’s a story of change, innovation, and, most of all, vision. It’s about seeing beyond the smog of the present towards a future where the air is a little clearer and the skies a little bluer.

At the heart of this transformation is an unusual hero: tax exemptions. 

Yes, you heard that right. The Indian government, in a strategic move, is turning the tables on the energy narrative, making renewable energy investments not just a good deed for the planet but a smart one for the wallet as well.

Let’s embark on this fascinating journey, shall we?

It’s not every day you get to see a nation redefine its future, one tax-free renewable project at a time.

Tax Exemption Policies on Renewable Energy in India

India encourages income tax exemption for solar power projects like Section 80-IA of the Income Tax Act, 1961, Accelerated Depreciation (AD), and GST exemptions.

By providing tax breaks and other savings for renewable energy projects, these policies hope to encourage investment in this sector. Tax exemptions have improved renewable energy investment, job creation, and economic growth.

India has implemented several tax exemption policies to promote renewable energy development in the country.

These policies include:

• Accelerated Depreciation (AD) under the Income Tax Act, 1961
• Goods and Services Tax (GST) exemptions

These tax exemption rules have promoted renewable energy growth in India. Let’s dive deeper to understand more of it.

Accelerated Depreciation (AD) Under the Income Tax Act 1961

AD allows businesses to claim higher solar tax depreciation rates for assets used in renewable energy projects. Under the standard depreciation rate of 20% on plant and machinery, businesses recover their investment in assets over a period of time.

However, the Indian government allows companies to claim 80% depreciation on solar power plants in the first year. Businesses can return a higher amount of their investment in the first year, reducing project costs and making it financially feasible.

For example, if a business invests Rs. 1 crore in a solar power plant, it can claim depreciation of Rs. 80 lakh in the first year itself. This reduces their taxable income and results in significant tax savings.

Thus, more businesses invest in solar power projects, boosting India’s renewable energy sector.

Goods and Services Tax (GST) Exemptions

GST exemptions apply to some goods and services utilized in renewable energy initiatives. This comprises batteries, inverters, wind turbines, and solar panels.

These exemptions help to reduce the cost of procuring these goods and services, making renewable energy projects more financially viable.

The impact of GST on renewable energy makes it more affordable for consumers and businesses, encouraging their adoption.

The exemption on renewable energy goods and services helps the government reach 450 GW of renewable energy capacity by 2030 and promote sustainable economic growth.

Impact of Tax Exemptions on the Renewable Energy Sector

Tax exemptions have  been instrumental in promoting the use of renewable energy in India. These tax exemptions boost renewable energy investments, savings, job creation, and economic growth.

• Increase in Renewable Energy Investments

Tax exemptions have attracted investors to renewable energy projects in India. With tax exemptions in place, renewable energy projects become more financially attractive to investors, resulting in an influx of funds towards these projects. SustVest a prominent alternative investment platform, allows retail investors to invest in alternative energy. 

Tax incentives allow investors to earn better profits, which has raised sector interest.

This increasing investment has funded additional renewable energy projects nationwide, helping the sector thrive. Tax incentives have drawn Indian investors to renewable energy.

• Cost Savings For Renewable Energy Projects

Tax exemptions have helped reduce the cost of renewable energy projects. The Accelerated Depreciation (AD) benefit, for example, allows renewable energy projects to claim a higher rate of depreciation in the first year of installation.

This helps reduce the tax liability of renewable energy projects in the early years, allowing them to save on costs.

• Job Creation and Economic Growth

The renewable energy sector in India has created many jobs. The Ministry of New and Renewable Energy reported about 12 million jobs in 2021. Renewable energy jobs include engineers, technicians, project managers, and administrative employees.

The renewable energy sector has created jobs, attracted investments and stimulated economic activity. It has also reduced the country’s reliance on imported fossil fuels.

Advantages of Tax Exemption on Renewable Energy in India

Tax exemption on renewable energy in India has several advantages. Here are some of the income tax benefits for renewable energy in India are outlined below:

• Reduction in cost of renewable energy: Tax exemption on renewable energy equipment and machinery lower project costs. This makes renewable energy cheaper for households and businesses in India, encouraging its adoption. Renewable energy is also cheaper than fossil fuels.
• Increase in investment in renewable energy: Renewable energy tax exemption encourages company and investor investment. This boosts renewable energy investment, creating jobs and economic prosperity in India. It diversifies the country’s energy mix, lowering fossil fuel dependence and boosting energy security.
• Encouragement of green energy and reduction of carbon footprint: Wind, solar, and hydropower are cleaner and more sustainable than fossil fuels. Thus, tax exemption encourages their use. This lowers India’s carbon footprint. Tax exemption promotes renewable energy and reduces climate change.
• Promotion of rural development: Tax exemption on renewable energy equipment and machinery can promote rural development by increasing access to affordable and reliable electricity. Renewable energy projects can bring electricity to remote places without grid connectivity. This can boost rural living and economic development.
• Promotion of innovation and technology development: Renewable energy tax exemptions can boost innovation and technology. Tax exemption can help firms and investors test innovative technology and business models by lowering renewable energy project costs. This can lead to more efficient and cost-effective renewable energy solutions, benefiting the industry.

Challenges and Limitations of Tax Exemption Policies

Tax exemption policies on renewable energy in India have been instrumental in promoting renewable energy development, but there are also challenges and limitations associated with these policies.

Some of the major challenges and limitations are discussed below:

• Implementation challenges: The implementation of tax exemption policies can be a challenge due to a lack of clarity and transparency. The policies may have complex eligibility criteria and procedural requirements, which can be difficult to understand and comply with. This can lead to delays and complications in availing the tax benefits.
• Revenue loss for the government: Tax exemptions reduce government revenue, which can hurt the economy. The government may need to raise taxes or cut spending to make up for the revenue loss.
• Limited budgetary resources: Tax exemptions reduce government revenue, which can hurt the economy. The government might require to raise taxes or cut spending to compensate for revenue losses.
• The limited scope of tax exemptions: Tax exemptions are limited to certain aspects of renewable energy projects, such as capital expenditure and depreciation. This means that renewable energy project costs like operation and maintenance may not be tax-deductible.
• Uncertainty of policies: Tax exemption policies are subject to change over time, which can create uncertainty for renewable energy investors. Policy changes may hinder investors’ investment planning and postpone project realization.

FAQs

What types of renewable energy projects are eligible for tax exemption in India?

All types of renewable energy projects, including solar, wind, biomass, and hydro projects, are eligible for tax exemption under Section 80-IA and Accelerated Depreciation policies.

Can individuals claim tax exemption on their personal investments in renewable energy projects?

No, tax exemption policies on renewable energy in India are applicable only to companies and organisations investing in such projects.

How much tax exemption can be claimed under the Accelerated Depreciation policy?

Companies can claim up to 40% depreciation in the first year and 20% in subsequent years on investments made in renewable energy projects.

Are there any limitations to the amount of tax exemption that can be claimed under Section 80-IA?

No, there are no limitations to the amount of tax exemption that can be claimed under Section 80-IA for renewable energy projects.

Do tax exemptions on renewable energy projects in India have any environmental benefits?

Yes, tax exemptions on renewable energy projects encourage investments in clean energy and help reduce the country’s carbon footprint, thus promoting environmental sustainability.

Conclusion

Tax exemptions have helped India adopt renewable energy. Section 80-IA, Accelerated Depreciation, and renewable energy GST exemptions have provided significant cost savings and incentives for investors in the renewable energy sector.

Tax exemptions have created jobs, boosted the economy, and cut carbon emissions. However, these policies face income loss and clarity issues. 

The success stories of renewable energy projects with tax exemptions demonstrate the potential for further development in the sector.

Looking forward, it is essential to continue to review and improve tax exemption policies to promote sustainable energy use and achieve India’s energy goals.

If you have any questions related to it, feel free to contact us.

Also read : Financial Benefits Of Investing In Renewable Energy