Corporate Social Responsibility (CSR): formula sheet

Key formulas

Applicability thresholds (Section 135(1))

Net worth ≥ ₹500 crore OR turnover ≥ ₹1,000 crore OR net profit ≥ ₹5 crore, in the immediately preceding financial year

Meeting any one threshold is enough. The test looks at the immediately preceding financial year.

Minimum CSR spend (Section 135(5))

CSR spend ≥ 2% × average net profit of the three immediately preceding financial years

Net profit is calculated as per Section 198 and excludes sums prescribed. If the company is under three years old, use the immediately preceding financial years available.

CSR Committee composition (Section 135(1))

At least 3 directors, including 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 exemption (Section 135(9))

If CSR amount ≤ ₹50 lakh, no Committee is required

The Board of Directors then performs the Committee's functions.

Ongoing project unspent amount (Section 135(6))

Transfer to Unspent CSR Account within 30 days from end of financial year; spend within 3 financial years from transfer

If not spent, transfer to a Schedule VII Fund within 30 days from completion of the third financial year.

Other unspent amount (Section 135(5))

Transfer to a Schedule VII Fund within 6 months of the expiry of the financial year

This applies when the unspent amount does not relate to an ongoing project. The Board must also give reasons in its report.

Penalty (Section 135(7))

Company: lesser of 2 × amount to be transferred or ₹1 crore. Officer in default: lesser of 1/10 of that amount or ₹2 lakh

Applies on default under sub-section (5) or (6).

Applicability test

Net worth ≥ ₹500 crore OR turnover ≥ ₹1,000 crore OR net profit ≥ ₹5 crore (in the immediately preceding financial year)

Any one limb is enough. The limits are 'or more', so exactly equal to the limit is covered.

Committee size

At least 3 directors, including at least 1 independent director

Where the company need not appoint an independent director under section 149(4), at least 2 directors.

Committee functions

Formulate and recommend CSR Policy + recommend expenditure + monitor the policy

Section 135(3). The Board approves the policy under section 135(4).

Small-spend relief

CSR amount ≤ ₹50 lakh → no committee; the Board discharges its functions

Section 135(9). Applies where the amount to be spent under sub-section (5) does not exceed ₹50 lakh.

Minimum CSR spend

2% × average net profit of the 3 immediately preceding financial years

Section 135(5). Net profit is computed under section 198.

Disclosure

Board's report (section 134(3)) discloses committee composition; policy contents disclosed in report and on website, if any

Section 135(2) and 135(4)(a).

Committee's duties (s. 135(3))

Formulate and recommend CSR Policy + recommend expenditure amount + monitor the policy

Policy must indicate activities in areas or subjects specified in Schedule VII.

Board's duties (s. 135(4))

Approve policy after considering Committee's recommendations + disclose contents in Board's report + place on website, if any + ensure activities are undertaken

The Board approves; the Committee only recommends.

Minimum CSR spend (s. 135(5))

At least 2% of average net profit of the three immediately preceding financial years

Net profit is calculated under section 198, excluding prescribed sums. For a company under three years old, use the immediately preceding years completed.

Committee composition (s. 135(1))

3 or more directors, at least 1 independent director

If the company need not appoint an independent director under s. 149(4), 2 or more directors suffice.

Small-spend exemption (s. 135(9))

Amount to be spent ≤ ₹50 lakh → no Committee; Board performs its functions

Test is on the amount to be spent, not on profit.

Disclosure of Committee (s. 135(2))

Board's report under s. 134(3) discloses composition of the CSR Committee

Policy contents are also disclosed under s. 135(4)(a).

CSR obligation

CSR obligation = 2% × (Net profit of Year 1 + Year 2 + Year 3) ÷ 3

The three years are the immediately preceding financial years. 'At least' 2% means this is a minimum. A younger company uses the preceding years it has completed.

Net profit starting point

Profit per books ± section 198 adjustments − CSR Rules exclusions

Section 135 says net profit is calculated as per section 198. The CSR Rules then exclude overseas branch profit and dividend from Indian companies covered by and complying with section 135.

Credit given in net profit (s.198(2))

Add: bounties and subsidies from Government or authorised public authority

Credit is given unless the Central Government directs otherwise.

Credit not given (s.198(3))

Exclude: premium on shares or debentures, profit on sale of forfeited shares, capital profits, profit on sale of immovable property or capital fixed assets, fair value changes in equity reserves, unrealised or notional gains and revaluation gains

Premium is excluded unless the company is an investment company. Profit on sale of fixed assets is excluded unless the business is buying and selling such assets. Under the proviso, if sale price exceeds written-down value, credit is given for the excess up to the original cost minus written-down value.

Deductions (s.198(4))

Deduct: usual working charges, directors' remuneration, staff bonus or commission, interest on debentures, mortgages and unsecured loans, non-capital repairs, depreciation as per section 123, bad debts written off, legal compensation or damages, and related insurance

Also deduct outgoings including contributions under section 181 and the carried excess of expenditure over income of earlier years, to the extent not yet deducted.

Not deducted (s.198(5))

Do not deduct: income-tax and super-tax, voluntary compensation or damages, capital losses, fair value changes in equity reserves

Capital loss does not include the excess of written-down value over sale proceeds or scrap value of an asset sold, discarded, demolished or destroyed. That excess is allowed.

Administrative overheads

Administrative overheads ≤ 5% of total CSR expenditure of the financial year

Stated in the CSR Rules. It covers general management and administration of CSR, not the project costs themselves.

Set-off of excess spend

Excess = Actual eligible CSR spend − Required spend; set off against the succeeding financial years allowed by the CSR Rules

The proviso to s.135(5) only allows set-off against the requirement of 'such number of succeeding financial years and in such manner, as may be prescribed'. The number of years and the conditions come from the CSR Rules, not from the Act. Under the Rules, the excess must not come from activities in the ordinary course of business. The CSR Committee must recommend it, the Board must approve it, and the Board's report must disclose it.

Minimum CSR spend

CSR spend ≥ 2% × average net profit of the three immediately preceding financial years

Net profit is calculated under section 198, excluding sums prescribed. If the company has not completed three years since incorporation, use the immediately preceding years available.

Activities test

Eligible activity = falls within an area or subject specified in Schedule VII and is included in the Board-approved CSR Policy

Section 135(3)(a) links the policy to Schedule VII areas or subjects.

Local area preference

Preference to the local area and areas around where the company operates

This is a proviso to section 135(5). It is a preference, not a ban on spending elsewhere.

Implementation modes

Direct by company, or through implementing agency (section 8 company, registered trust or registered society), or jointly with other companies

The CSR Rules govern agencies and CSR-1 registration. Write this as a Rules point, without quoting a rule number you are unsure of.

Unspent amount, ongoing project

Transfer within 30 days from end of financial year to Unspent CSR Account; spend within 3 financial years; else transfer to a Schedule VII Fund within 30 days of the third year ending

Section 135(6).

Unspent amount, other than ongoing project

Transfer to a Fund specified in Schedule VII within six months of expiry of the financial year

Section 135(5), second proviso, with reasons in the Board's report.

Penalty

Company: twice the amount to be transferred or ₹1 crore, whichever is less. Officer in default: one-tenth of that amount or ₹2 lakh, whichever is less

Section 135(7).

Committee relaxation

If CSR amount ≤ ₹50 lakh, no CSR Committee; Board performs its functions

Section 135(9).

Minimum CSR spend

2% × average net profit of the three immediately preceding financial years

Net profit is calculated under section 198, excluding prescribed sums. A company not yet three years old uses the immediately preceding years it has completed.

Unspent amount, no ongoing project

Board report reasons (s.134(3)(o)) + transfer to Schedule VII Fund within 6 months of the expiry of the financial year

Section 135(5), second proviso.

Unspent amount, ongoing project

Transfer to Unspent CSR Account within 30 days from end of financial year; spend within 3 financial years from date of transfer

Section 135(6). A separate account is opened for each financial year.

Balance after three years

Transfer to Schedule VII Fund within 30 days from completion of the third financial year

Applies if the Unspent CSR Account money is still not spent.

Company penalty

Lower of (2 × amount required to be transferred) and ₹1 crore

Section 135(7).

Officer in default penalty

Lower of (1/10 × amount required to be transferred) and ₹2 lakh

Section 135(7). Applies to every officer in default.

Lesser penalty for certain companies

Not more than half the specified penalty, capped at ₹2 lakh (company) and ₹1 lakh (officer or other person)

Section 446B: One Person Company, small company, start-up company or Producer Company.

Excess spending set-off

Excess spend may be set off against requirement of succeeding financial years, as prescribed

Section 135(5), third proviso. Number of years and manner are as prescribed.

Impact assessment applicability (company test)

Average CSR obligation of the 3 immediately preceding financial years ≥ ₹10 crore

Average of the obligation, not of actual spending. Below this level, impact assessment is not mandatory.

Impact assessment applicability (project test)

Project outlay ≥ ₹1 crore AND project completed at least 1 year before the assessment

Both conditions must be met. Ongoing projects do not qualify.

Cost cap for impact assessment

Maximum bookable = higher of (5% × total CSR expenditure for the year) or ₹50 lakh

Only this amount can be counted as CSR expenditure. Any excess is a normal business cost.

Board's report content on CSR

Section 134(3)(o): details of the CSR policy developed and implemented, and initiatives taken during the year

The second proviso allows salient features plus the web address where the policy is on the website.

Signing of Board's report

Authorised chairperson, OR at least two directors (one being MD), OR the sole director

Section 134(6).

Penalty for default under Section 134

Company ₹3,00,000; each officer in default ₹50,000

Section 134(8).

Quick revision

• CSR applies if net worth is ₹500 crore or more, turnover ₹1,000 crore or more, or net profit ₹5 crore or more in the immediately preceding financial year.
• The CSR Committee has three or more directors, including at least one independent director.
• If a company need not appoint an independent director under Section 149(4), its CSR Committee needs two or more directors.
• If the CSR amount does not exceed ₹50 lakh, no committee is needed and the Board performs its functions.
• The Committee formulates the policy, recommends the expenditure and monitors the policy; the Board approves the policy.
• Spend at least 2% of the average net profit of the three immediately preceding financial years.
• A company not yet three years old uses the immediately preceding financial years it has completed.
• Net profit is calculated under Section 198; capital profits and unrealised or notional gains are not credited.
• Preference must be given to the local area and areas around where the company operates.
• Unspent amount for an ongoing project goes to the Unspent CSR Account within thirty days of the financial year end; spend it within three financial years.
• Other unspent amounts go to a Schedule VII Fund within six months of the expiry of the financial year, and the Board report must give reasons.
• Penalty on the company is twice the amount to be transferred or ₹1 crore, whichever is less; on each officer in default it is one-tenth of that amount or ₹2 lakh, whichever is less.

Common mistakes

• Treating CSR and philanthropy as the same thing. Fix: State that philanthropy is voluntary and often one-off, while CSR is planned, policy-based, tied to stakeholders and, for covered companies, mandatory.
• Saying a company must spend 2% of the current year's profit. Fix: Write: at least 2% of the average net profits made during the three immediately preceding financial years.
• Requiring all three thresholds to be met. Fix: The test is 'or'. Meeting any one limb makes the company covered.
• Testing the current year's figures instead of the preceding year's. Fix: Always identify the year in question first, then go one year back.
• Saying the CSR Committee approves the policy. Fix: Write that the Committee formulates and recommends, and the Board approves under section 135(4)(a).
• Forgetting to mention website placement and Board's report disclosure. Fix: Always add that the contents are disclosed in the Board's report and the policy is placed on the website, if any, in the prescribed manner.
• Using the book profit or profit after tax as net profit. Fix: Always write 'net profit as per section 198' and adjust. Income-tax is not deducted under section 198(5)(a), so a profit after tax figure must have the tax added back.
• Including the current year in the average. Fix: The statute says the three immediately preceding financial years. Use the years before the year in which the amount is spent.
• Treating a political contribution as CSR spend. Fix: Remember section 182 is a separate regime with its own Board resolution and disclosure rules. Political contributions do not count towards the two per cent.
• Counting employee welfare or normal business spending as CSR. Fix: CSR must fall under a Schedule VII theme and benefit the intended beneficiaries. Benefits only for employees or routine business costs do not fit.

Exam tips

• Begin every theory answer with a crisp definition, then the evolution in order. Examiners reward structure.
• Quote thresholds and time limits exactly: ₹500 crore, ₹1,000 crore, ₹5 crore, 2%, three years, 30 days, 6 months.
• In case-based questions, test each threshold separately, show the average-profit calculation and state the conclusion in one line.
• For distinction questions, use four or five clear points such as motive, nature, legal force and accountability.
• Refer to the Act's wording where you can, but keep it in your own words and avoid long quotations.
• Write the provision first, then apply the figures. Examiners reward the order: provision, analysis, conclusion.
• Always show the year being tested. Marks are often lost for using the wrong year.
• Show the 2% computation even when the question only asks about the committee. It decides the ₹50 lakh point.