CS Professional · CSR and Social Governance

CSR Policy: formula sheet

Full chapter guide

Key formulas

Applicability thresholds (any one): Net worth ≥ ₹500 crore OR Turnover ≥ ₹1,000 crore OR Net profit ≥ ₹5 crore; Tested for the immediately preceding financial year. One test is enough.
Committee composition: CSR Committee = 3 or more directors, at least 1 independent director; If the company need not appoint an independent director under section 149(4), it needs 2 or more directors.
Small-spend exception: If CSR amount under s.135(5) ≤ ₹50 lakh, no Committee needed; the Board performs its functions; Section 135(9). The exception applies to 'does not exceed' fifty lakh rupees.
Minimum CSR spend: CSR spend ≥ 2% × average net profit of 3 immediately preceding financial years; For a company not yet three years old, the preceding years since incorporation are used. Net profit is worked out under section 198.
Disclosure: Board's report (s.134(3)) must disclose the CSR Committee composition; Section 135(2).
Trigger for CSR Committee: Net worth ≥ ₹500 crore OR turnover ≥ ₹1,000 crore OR net profit ≥ ₹5 crore (in the immediately preceding financial year); Any one condition is enough. Test the immediately preceding financial year.
Composition (general): Minimum 3 directors, of whom at least 1 is an independent director; The section says directors, not only non-executive directors.
Composition (no independent director required): Minimum 2 directors; Applies where the company is not required to appoint an independent director under section 149(4).
Functions of the Committee: Formulate and recommend CSR Policy (Schedule VII activities) + recommend expenditure amount + monitor the Policy from time to time; Three functions under section 135(3).
Duties of the Board: Approve Policy after considering Committee's recommendations + disclose it in Board's report and on website + ensure activities are undertaken; Section 135(4). The Board also ensures the 2% spend under section 135(5).
Small-spend exemption: If CSR amount under s.135(5) ≤ ₹50 lakh, no Committee; the Board discharges its functions; Section 135(9). The test is the amount to be spent, not profit.
Spending obligation (context): At least 2% of average net profit of the 3 immediately preceding financial years; Net profit is calculated under section 198, as prescribed.
Who formulates the policy: CSR Committee formulates and recommends → Board approves; Section 135(3)(a) and 135(4)(a). If the amount to be spent is up to ₹50 lakh, the Board performs the Committee's functions (Section 135(9)).
Content of the policy: Activities in areas or subjects in Schedule VII + recommended expenditure + monitoring; Section 135(3). The Committee recommends the amount of expenditure on the activities.
Board's duties on the policy: Approve policy + disclose contents in Board's report + place on website, if any + ensure activities are undertaken; Section 135(4). The website display is in the manner prescribed.
Minimum CSR spend: At least 2% × average net profit of the 3 immediately preceding financial years; Section 135(5). Net profit is calculated under Section 198. Preference goes to the local area and areas around it.
Committee composition disclosure: Composition of CSR Committee is disclosed in the Board's report; Section 135(2), read with Section 134(3).
Default penalty on company: Lower of (2 × amount required to be transferred) and ₹1 crore; Section 135(7), for default in Section 135(5) or (6).
Default penalty on officer: Lower of (1/10 of amount required to be transferred) and ₹2 lakh; Section 135(7), for every officer in default.
Minimum CSR spend: Minimum CSR spend = 2% × (Net profit of year 1 + year 2 + year 3) ÷ 3; Use the three immediately preceding financial years. If the company is under three years old, average the years it has completed. Net profit is computed under section 198.
Unspent amount: Unspent amount = Minimum CSR spend − Actual eligible CSR spend; Check first whether the shortfall relates to an ongoing project.
Ongoing project: transfer deadline: Transfer to Unspent CSR Account within 30 days from end of the financial year; Section 135(6). The account is opened in any scheduled bank, separately for that financial year.
Ongoing project: spending period: Spend within 3 financial years from the date of transfer; else transfer to Schedule VII Fund within 30 days of completing the third financial year; Section 135(6).
Other than ongoing project: Transfer to Schedule VII Fund within 6 months of the end of the financial year, and state reasons in Board's report; Second proviso to section 135(5).
Penalty on company: Lower of (2 × amount not transferred) and ₹1 crore; Section 135(7), for default under sub-section (5) or (6).
Penalty on officer in default: Lower of (1/10 of amount not transferred) and ₹2 lakh; Section 135(7).
Set-off of excess: Excess spend may be set off against requirement of succeeding financial years; Third proviso to section 135(5). The number of years and the manner are as prescribed in the CSR Rules.
Small CSR obligation: If amount to be spent ≤ ₹50 lakh, no CSR Committee is needed; the Board performs its functions; Section 135(9).
Company penalty, section 135(7): Lower of (2 × amount required to be transferred) and ₹1 crore; Amount is that required to go to the Schedule VII Fund or the Unspent CSR Account, as the case may be.
Officer in default penalty, section 135(7): Lower of (1/10 × amount required to be transferred) and ₹2 lakh; Applies to every officer of the company who is in default.
Lesser penalty, section 446B: Not more than one-half of the specified penalty, capped at ₹2 lakh (company) and ₹1 lakh (officer); Applies to a One Person Company, small company, start-up company or Producer Company, notwithstanding other provisions of the Act.
Annual CSR spend, section 135(5): At least 2% × average net profit of the three immediately preceding financial years; Net profit is calculated under section 198 and excludes sums prescribed. For a company not yet three years old, use the immediately preceding years available.
Unspent amount, ongoing project, section 135(6): Transfer within 30 days from end of the financial year to the Unspent CSR Account; spend within 3 financial years; else transfer to a Schedule VII Fund within 30 days of completing the third year; Unspent amount for a project that is not ongoing goes to a Schedule VII Fund within six months of the end of the financial year, under the second proviso to section 135(5).
Committee exemption, section 135(9): If amount to be spent ≤ ₹50 lakh, no CSR Committee is needed; the Board performs its functions; Reporting duties remain with the Board.

Quick revision

Section 135 applies if net worth is ₹500 crore or more, or turnover is ₹1,000 crore or more, or net profit is ₹5 crore or more in the immediately preceding financial year.
The CSR Committee has three or more directors, with at least one independent director.
If a company need not appoint an independent director under section 149(4), its Committee needs two or more directors.
If the amount to be spent does not exceed ₹50 lakh, no Committee is needed and the Board performs its functions.
The Committee recommends the policy and the amount, and monitors the policy. The Board approves the policy.
The Board must disclose the policy contents in its report and place it on the company's website, if any.
Minimum spend is 2% of the average net profit of the three immediately preceding financial years, calculated under section 198.
Preference must go to the local area and areas around where the company operates.
Excess spend may be set off against future years as prescribed.
Unspent amount for an ongoing project goes to the Unspent CSR Account within thirty days of year-end and must be spent within three financial years.
Other unspent amounts go to a Schedule VII Fund within six months of year-end, and the Board's report must give reasons.
Penalty on the company is twice the amount to be transferred or ₹1 crore, whichever is less. For each officer in default it is one-tenth of that amount or ₹2 lakh, whichever is less.

Common mistakes

Requiring all three tests to be met. Fix: Remember they are alternatives. Any one is enough.
Testing the wrong financial year. Fix: The tests use the immediately preceding financial year. The three-year average is only for the 2% spend amount.
Saying all three thresholds must be met before a committee is required. Fix: Remember the word 'or'. Any one of net worth, turnover or net profit is enough.
Applying the ₹50 lakh relief to profit or turnover instead of the CSR amount. Fix: Section 135(9) refers to the amount to be spent under section 135(5). Compute 2% of average net profit first.
Saying the CSR Committee approves the CSR Policy. Fix: Remember: the Committee formulates and recommends, the Board approves. Section 135(3) and 135(4) are separate.
Writing that the full policy must be printed in the Board's report and also on the website. Fix: The Act says the Board discloses the contents of the policy in its report and places the policy on the website, if any, in the prescribed manner.
Using the current year's profit instead of the average of the three preceding years. Fix: Always write 'average of the three immediately preceding financial years' and list each year's figure.
Using book profit without adjusting under section 198. Fix: Check whether the question gives net profit or accounting profit. Remove items not credited under section 198(3), such as capital profits, and do not deduct income-tax.
Saying the company penalty is always ₹1 crore. Fix: The penalty is the lower of twice the amount and ₹1 crore. Always compute both.
Applying the penalty to the whole CSR obligation instead of the amount required to be transferred. Fix: Use the unspent amount that should have gone to the Fund or the Unspent CSR Account.

Exam tips

Always write the three limits with the words 'immediately preceding financial year'. Examiners look for it.
Show each test separately in a case answer, then conclude. A bare 'applicable' loses marks.
Keep the applicability test (one year) separate from the spend base (three-year average).
Add the sub-section (9) point whenever the facts give figures that let you compute the CSR amount.
For foreign or group company questions, apply the tests to the entity concerned and state the rule in words, not a made-up section.
Write the section number and the exact threshold wording. Examiners reward the structure of provision, facts, conclusion.
In case questions, always compute the 2% amount before deciding whether a committee is needed.
Draw a clear line between the committee's tasks (formulate, recommend, monitor) and the Board's tasks (approve, disclose, ensure).