Solar Payback and IRR Explained for Indian Homes
How to calculate rooftop solar payback and IRR in India, with worked 3 kW and 5 kW examples, the assumptions that matter, and a comparison with an FD.
Short answer: payback is how many years your bill savings take to repay what you spent; IRR is the yearly return the system earns over its life. A typical 3 kW home system in India that costs ₹1.8 lakh, gets the ₹78,000 subsidy and saves units worth ₹8 each pays back in about 3 years with an IRR around 30–35% on our conservative assumptions. Results swing most with your tariff slab, system price and city yield.
The simple payback formula
Payback (years) = Net cost ÷ Yearly saving
- Net cost = installed price − subsidy (central plus any state top-up)
- Yearly saving = units generated × value of each unit
The tricky part is the value of each unit. It is not your average tariff; it is the rate of the slab solar removes you from, plus duty and surcharges that scale with units. Then subtract anything exported beyond your use, which earns only the low surplus rate.
| Example | Value of a saved unit (approx.) |
|---|---|
| MSEDCL home at 300 units (101–300 slab) | ₹10.80 + ₹1.60 wheeling, plus 16% duty ≈ ₹14 |
| MSEDCL home at 500 units (301–500 slab) | ₹15.03 + ₹1.60, plus 16% duty ≈ ₹19 |
| Gujarat home at 250+ units | ₹5.20 slab + FPPAS about ₹2.5–3 + duty ≈ ₹8–9 |
| Karnataka home | ₹5.80 flat + surcharge and tax ≈ ₹6.5 |
| Surplus export (most states) | ₹2–3.90 |
From Sunlectric tariff notes, Oct 2026. Check against your latest bill. See how to read your electricity bill.
Worked example: 3 kW in a typical city
Assumptions (all editable in the simulator below):
- Price ₹60,000 per kW → ₹1,80,000
- Subsidy ₹78,000 → net cost ₹1,02,000
- Yield 1,500 units per kW per year → 4,500 units in year 1
- Module degradation 1% in year 1, then 0.4% a year (TOPCon warranty curve)
- Every unit valued at ₹8, rising 1% a year
- Free maintenance for 5 years (included under PM Surya Ghar), then ₹800 per kW per year rising 5%
- Inverter replaced in year 12 at ₹5,500 per kW
| Result | With subsidy | Without subsidy |
|---|---|---|
| Net cost | ₹1,02,000 | ₹1,80,000 |
| Year-1 saving | about ₹35,600 | about ₹35,600 |
| Simple payback | about 2.8 years | about 5.0 years |
| 25-year IRR | about 35% | about 19% |
| 25-year net gain (undiscounted) | about ₹7.6 lakh | about ₹6.8 lakh |
Change one input at a time:
| Change | Payback | IRR |
|---|---|---|
| Unit value ₹6 instead of ₹8 | about 3.8 years | about 25% |
| Unit value ₹12 (high slab) | about 1.9 years | about 50% |
| 5 kW at ₹57,000/kW, ₹8/unit | about 3.5 years | about 28% |
Sunlectric calculation, Oct 2026, using the assumptions listed. It assumes every unit generated is used or netted at the full unit value. If you export a lot of surplus, your result will be lower.
What IRR means, and how to compare it
IRR answers: "If this system were a deposit, what interest rate would it pay?" Compare it with alternatives over a similar horizon (October 2026 figures):
| Investment | Return |
|---|---|
| SBI FD, 5–10 years | 6.05% |
| PPF (Oct–Dec 2026) | 7.1% |
| 10-year government bond yield | about 7.36% |
| RBI Floating Rate Savings Bond (Jul–Dec 2026) | 8.05% |
Solar returns are not guaranteed like an FD: they depend on the sun, your usage, tariffs and the system lasting. But even conservative cases usually beat fixed-income options by a wide margin, and the savings are not taxed as interest income.
The assumptions that move the result
- Tariff slab. The biggest lever. Homes in high slabs save the most per unit.
- System sizing. Oversizing sends units out at ₹2–3.90 instead of saving ₹8–19. See solar for 300 units.
- Free-unit schemes. Karnataka, Telangana, Tamil Nadu and Rajasthan give free units to eligible homes, which shrinks savings.
- Price escalation. We use 1% a year. History is 3.5–5.5%, but some regulators have cut or frozen residential rates. A payback that needs big tariff hikes is a weak payback.
- Yield. UP cities make around 1,380–1,420 units per kW per year; Rajasthan and Gujarat 1,540–1,660. Shade, dust and poor cabling cut it further.
- Downtime. Tail-end feeders with high voltage trip inverters; grid outages switch on-grid systems off. We allow about 2%.
- Surplus settlement. Monthly settlement (Karnataka, Telangana, AP) wastes more surplus than annual settlement.
Payback with a loan
PM Surya Ghar offers collateral-free loans linked to the repo rate (about repo + 0.5%, check current rate). If the EMI is lower than your monthly saving, the system is cash-positive from the first month. The subsidy usually arrives within weeks of commissioning and can be used to prepay the loan.
For installers
Show customers the value-of-a-saved-unit, not the average tariff, and list every assumption. Sunlectric Studio builds a 25-year cash flow with state tariffs, surplus rates and grid support charges, and the Academy business module teaches IRR and objection handling. See also how to win more residential jobs.
Payback or IRR: which should you look at?
Payback is easy to understand and good for comparing quotes at the same size. IRR is better for comparing solar with other uses of your money, and for comparing system sizes, because it captures the full 25 years. Ask for both, with the assumptions written down.
Talk to Sunlectric
WhatsApp your bill and roof photo to +91 89567 89307 (wa.me/918956789307) and our Solar Desk will run the payback for your tariff and city. No pressure, just the numbers.
Sources
- Benchmark returns (SBI FD 6.05%, PPF 7.1%, 10-yr G-sec 7.36%, RBI FRSB 8.05%) and finance assumptions: Sunlectric benchmarks compiled 19 Oct 2026 from BankBazaar, Trading Economics, Business Today and RBI releases
- Tariffs and surplus rates: Sunlectric tariff notes, Oct 2026 (see state guides for sources)
- PM Surya Ghar CFA and loans: pmsuryaghar.gov.in; Mercom, 4 Aug 2026
- City yields: Global Solar Atlas, fetched 19 Oct 2026
Questions people ask
What is a good payback period for rooftop solar in India?
With the PM Surya Ghar subsidy, many homes see 3–5 years; homes in high-tariff slabs can see under 3. Without subsidy, 4–7 years is common. It depends on your tariff slab, city yield and system price.
What is IRR in solar?
IRR (internal rate of return) is the yearly interest rate that makes the system's 25-year savings worth exactly what you paid. It lets you compare solar with an FD, PPF or other investments on the same basis.
Should I assume electricity tariffs will rise?
Use a conservative figure. Indian residential tariffs rose about 3.5–5.5% a year over 2014–24, but some states have flat or falling rates now. A 0–3% escalation keeps the estimate honest.
Does a battery improve payback?
Usually not under net metering. A battery adds cost and replacement expense; its value is backup during outages.