How is the CSR 2 percent spend computed?
How the corporate social responsibility obligation works under section 135 of the Companies Act, 2013, the thresholds that pull a company in, the two per cent of average net profits it must spend, and what happens to an unspent amount.
In this guide
The CSR spend is two per cent of the average net profits of the three immediately preceding financial years, computed under section 198 of the Companies Act, 2013. Section 135(1) pulls a company in at net worth of Rs 500 crore, turnover of Rs 1,000 crore, or net profit of Rs 5 crore in the preceding year. Any one threshold is enough.
What does the CSR 2 percent rule require?
Corporate social responsibility under section 135 of the Companies Act, 2013 asks a company that crosses certain size thresholds to spend a fixed slice of its profits on recognised social activities. It is not a tax and not a donation drive; it is a statutory spend obligation with a committee, a policy and a reporting trail behind it.
The three pieces are: who the section binds, how much they spend, and what happens if the amount is not spent. The 2% figure is the one people remember, but the base it is applied to and the treatment of an unspent amount matter just as much.
Who is caught by section 135?
Section 135(1) catches a company that in the immediately preceding financial year had net worth of Rs 500 crore or more, turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more. The three tests are alternatives, so a company can be pulled in on turnover alone even where the other two figures are modest.
Applicability is tested on one year and the spend is computed on three. Mixing the two produces the wrong figure. For the wider obligation set, including the committee carve-outs and the penalty, read CSR compliance under section 135.
What is the base for the 2 percent?
The base is the average net profits of the three immediately preceding financial years, computed under section 198 of the Companies Act, 2013. The percentage is applied to that average, not to the latest year on its own, which smooths a single strong or weak year.
Is net profit the same as profit after tax?
No. Net profit for CSR is computed under section 198, which MCA's CSR FAQ circular describes as primarily profit before tax with the adjustments the CSR Rules specify. Using profit after tax, or the statement of profit and loss figure without the section 198 adjustments, is the most common computation error in this area.
What if the company is less than three years old?
A company that has not completed three financial years since incorporation takes the average over the financial years it has actually completed. So a company in its second year averages two years, and the two per cent applies to that shorter average.
| Element | What it means |
|---|---|
| Trigger | Net worth Rs 500 crore, turnover Rs 1,000 crore, or net profit Rs 5 crore in the preceding year |
| Rate | At least 2% |
| Base | Average net profits of the three preceding financial years, computed under section 198 |
| Vehicle | CSR committee (not required where the spend is Rs 50 lakh or less, section 135(9)) and a board-adopted CSR policy |
| Shortfall | Ongoing project: Unspent CSR Account within 30 days. Otherwise: Schedule VII fund within six months |
When must a CSR committee be constituted?
A CSR committee is required under section 135(1) unless the amount to be spent for the financial year does not exceed Rs 50 lakh, in which case section 135(9) lets the board discharge the committee's functions itself. The default composition is three or more directors with at least one independent director; a company not required to appoint an independent director under section 149(4) may constitute it with two directors.
The board adopts the CSR policy on the committee's recommendation. The spend flows through Schedule VII activities, and the board reports on it. The committee and policy are the governance layer that makes the two per cent a controlled spend rather than an ad hoc one.
Where does unspent CSR money go?
An unspent CSR amount tied to an ongoing project goes to an Unspent CSR Account in a scheduled bank within 30 days of the financial year end under section 135(6), and must be spent within three financial years from transfer. Any other unspent amount goes to a fund specified in Schedule VII within six months of the year end under section 135(5).
The board also records the reasons for the shortfall in its report. That disclosure is substantive, because section 135(7) keys the penalty to the failure to transfer rather than to the failure to spend.
How do I check my CSR spend figure?
- Read section 135 for the Rs 500 crore, Rs 1,000 crore and Rs 5 crore thresholds and sub-sections (5) to (9).
- Test each of the three thresholds separately against the immediately preceding financial year, since crossing any one brings the company in.
- Compute net profit under section 198 for each of the three preceding years, average them, then apply two per cent.
- Diary the 30-day Unspent CSR Account transfer and the six-month Schedule VII transfer as separate calendar rows.
- Watch MCA notifications for CSR Rules amendments, which have changed the committee and unspent-account conditions more than once.
Why is the CSR spend often computed wrong?
- Applying two per cent to the latest year's profit instead of the three-year average.
- Using profit after tax rather than net profit computed under section 198.
- Testing only net profit and missing a trigger on Rs 500 crore net worth or Rs 1,000 crore turnover.
- Treating an unspent amount as freely retainable past the 30-day or six-month transfer date.
- Assuming the Rs 50 lakh relief in section 135(9) removes the committee permanently, without checking the Unspent CSR Account condition in the Rules.
- Claiming CSR spend as business expenditure in the income-tax computation.
Where are CSR rule amendments notified?
The CSR thresholds, the recognised activities and the treatment of unspent amounts move through MCA notifications and rule amendments. Complied AI keeps MCA updates in one feed so you can open the source behind a change instead of working from an old note. When you need the rule itself, open section 135 next to the update.
Practical checks
Common questions
Which companies have to spend on CSR?
Section 135(1) of the Companies Act, 2013 catches a company that in the immediately preceding financial year had net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more. The three tests are alternatives. Crossing any single one pulls the company into CSR for that year.
How much must a company spend on CSR?
The CSR spend is at least two per cent of the average net profits of the three immediately preceding financial years. That average is the base, not the latest year's profit alone, and net profit is computed under section 198 of the Companies Act, 2013 rather than taken from profit after tax.
What happens if the CSR amount is not spent?
An unspent CSR amount cannot be retained. Money committed to an ongoing project goes to an Unspent CSR Account in a scheduled bank within 30 days of the financial year end under section 135(6). Any other unspent amount goes to a Schedule VII fund within six months. Section 135(7) penalises the failure to transfer.
Does a company below the thresholds still need a CSR committee?
No. The CSR committee obligation under section 135(1) follows from being within the thresholds, so a company that stops meeting all three tests in the preceding year is outside CSR for that year. Separately, section 135(9) removes the committee requirement where the amount to be spent does not exceed Rs 50 lakh.
Our profit crossed Rs 5 crore last year but we made losses before. What do we spend?
The CSR obligation applies because net profit of Rs 5 crore in the immediately preceding year triggers section 135(1), but the spend is two per cent of the three-year average net profit under section 198. Loss years pull that average down, so the spend can be small or nil while the committee, policy and reporting duties still apply in full.
Can we count a donation to a school building as CSR spend?
Only if the activity falls within Schedule VII of the Companies Act, 2013 and the company's own board-approved CSR policy. Promoting education is a Schedule VII head, so a school project can qualify. A contribution made for the company's own benefit, or in the normal course of business, does not become CSR by being reported that way.
What is the penalty for missing the CSR transfer date?
Section 135(7) imposes on the company twice the unspent amount that should have been transferred, or Rs 1 crore, whichever is less. Every officer in default pays one-tenth of that unspent amount, or Rs 2 lakh, whichever is less. The penalty attaches to the failure to transfer, so the 30-day and six-month dates matter on their own.
Can CSR spend be claimed as a business expense in the ITR?
No. CSR expenditure referred to in section 135 of the Companies Act, 2013 is not deemed to be incurred for the purposes of business or profession, following the Finance Act, 2014 amendment, and MCA's CSR FAQ circular records the same position. Add it back in the computation rather than claiming it under section 37 of the Income-tax Act, 1961.
Publication method
How this guide was prepared
This guide is published by the Complied AI research desk. Its source list and stated position were checked against the official records shown below on 29 August 2026.
Automation, including AI, may assist research, drafting and structure. It does not replace the official record or amount to an independent professional review. Read our editorial standards and corrections policy.
Verification path
Official sources used
Keep reading
Related guides
- How-to · MCAWhen must Form CHG-1 be filed after creating a charge?How a company registers a charge in Form CHG-1 under section 77 of the Companies Act, 2013, the 30-day clock, the extra 60 days the Registrar can allow, and why an unregistered charge is ignored in a winding up.
- How-to · MCAHow do I change a company's registered office in Form INC-22?How Form INC-22 records a change of registered office under section 12 of the Companies Act, 2013, the 30-day clock, when a special resolution and Form MGT-14 are also required, and the Rs 1,000 a day penalty cap.
- How-to · MCAHow does a company apply to strike off its name in Form STK-2?How a company applies in Form STK-2 under section 248(2) of the Companies Act, 2013 to remove its name from the register, the Rs 10,000 fee, overdue AOC-4 and MGT-7 that must be filed first, and why a section 8 company cannot use this route.