CSR and Social Governance · Corporate Social Responsibility

CSR Expenditure and Unspent Amount: 2% Rule and Unspent CSR Account

Updated 11 October 2026 · Fact-checked

A company covered by Section 135 must spend, every year, at least 2% of its average net profit of the three immediately preceding financial years, calculated under Section 198. Unspent money for an ongoing project goes to the Unspent CSR Account within 30 days of year end; other unspent money goes to a Schedule VII Fund within six months.

Understand CSR Expenditure and Unspent Amount

Section 135 does not stop at forming a CSR Committee. The Board must also make sure the company actually spends money. The minimum is 2% of the average net profit made during the three immediately preceding financial years. If the company is newer than three years, the average is taken over the years it has completed since incorporation.

Net profit is not the figure in your head or the headline profit. The Explanation to Section 135 says net profit is calculated under Section 198, and excludes sums that the CSR Rules prescribe. Section 198 adds and removes items: for example, profits of a capital nature, profits on sale of forfeited shares, and unrealised or notional gains are not credited. Directors' remuneration, interest and bad debts written off are deducted. Income-tax payable is not deducted.

The company should give preference to the local area and areas around where it operates. This is a condition of the spending, not a suggestion about size.

If the company spends more than required, it may set off the excess against the requirement of succeeding financial years, in the manner prescribed. If it spends less, the Board must state the reasons in its report under Section 134(3)(o). What happens next depends on whether the money relates to an ongoing project.

For an ongoing project, the unspent amount goes to a special Unspent Corporate Social Responsibility Account in a scheduled bank within 30 days of the end of the financial year. The company must spend it within three financial years of the transfer. If it does not, it moves to a Schedule VII Fund within 30 days of the end of the third year. For any other unspent amount, the transfer to a Schedule VII Fund is due within six months of the end of the financial year. Default attracts penalties on the company and on officers in default.

Key rules to remember

Minimum CSR spend: CSR obligation = 2% × average net profit of the three immediately preceding financial years; If the company has not completed three years since incorporation, use the immediately preceding years it has completed.
Average net profit: Average = (Net profit Year 1 + Year 2 + Year 3) ÷ 3; Each year's net profit is computed under Section 198, not simply taken from the profit and loss account.
Unspent amount: Unspent amount = CSR obligation − CSR amount actually spent; Board must give reasons in its report under Section 134(3)(o).
Ongoing project transfer: Transfer to Unspent CSR Account within 30 days from end of financial year; spend within 3 financial years from transfer; else transfer to Schedule VII Fund within 30 days of completion of third year; Applies to Section 135(6), for ongoing projects meeting prescribed conditions.
Non-ongoing unspent amount: Transfer to a Schedule VII Fund within six months of the expiry of the financial year; Applies where the unspent amount does not relate to an ongoing project.
Penalty on company: Lower of (2 × amount required to be transferred) and ₹1 crore; Section 135(7).
Penalty on officer in default: Lower of (1/10 of amount required to be transferred) and ₹2 lakh; Section 135(7).
Committee exemption: If CSR amount ≤ ₹50 lakh, no CSR Committee is needed; the Board discharges its functions; Section 135(9).

How to solve CSR Expenditure and Unspent Amount questions

Use this order for any numerical or case question on CSR spending and unspent amounts.

1Check that the company is covered by Section 135(1): net worth ₹500 crore or more, turnover ₹1,000 crore or more, or net profit ₹5 crore or more in the immediately preceding financial year.
2List the net profit of each of the three preceding years, computed under Section 198. Adjust the book profit if the question gives items to add or remove.
3Take the average of the three years. If the company is newer, average only the completed years.
4Multiply by 2% to get the obligation. Reduce it by any permitted set-off from earlier excess spending.
5Compare with the actual spend. Work out the unspent amount, or the excess available for set-off.
6If there is an unspent amount, decide whether it relates to an ongoing project. Apply the 30-day Unspent CSR Account route or the six-month Fund route.
7State the Board's duty to disclose reasons in its report, and state the penalty if the company defaults.
8Conclude clearly: amount due, where it goes, and by when.

Quickest way: Three-line CSR check

When to use it: Use when time is short and the question gives profits and spending figures.

Line 1: Section 198 profits of three years, then average, then 2%.
Line 2: Obligation minus spend equals unspent (or excess, if spend is higher).
Line 3: Ongoing project? Unspent CSR Account in 30 days, spend in 3 years. Otherwise Fund in six months.

Common mistakes in CSR Expenditure and Unspent Amount

Using only the last year's profit instead of the three-year average.
Students link the test for applicability (preceding year) with the spending test.
Fix: Applicability looks at the immediately preceding year. The spending obligation uses the average of three preceding years.
Taking profit after tax or profit before tax from the accounts as net profit.
The question gives a profit figure and the student uses it directly.
Fix: Remember the Explanation to Section 135: net profit is calculated under Section 198. Apply its additions and deductions, and do not deduct income-tax payable.
Mixing up the two deadlines for unspent money.
Both involve a transfer and a time limit.
Fix: Ongoing project: Unspent CSR Account within 30 days of year end. Other unspent amount: Schedule VII Fund within six months of year end.
Treating the three-year spending period as the time to transfer to a Fund in all cases.
The three-year period in Section 135(6) is remembered without its context.
Fix: The three years apply only to the Unspent CSR Account, counted from the date of transfer. After that, the balance goes to a Fund within 30 days of the end of the third year.
Stating the penalty as a flat ₹1 crore or ₹2 lakh.
Only the caps are remembered.
Fix: The penalty is the lower of the two measures: twice the amount for the company, one-tenth for the officer, against the caps of ₹1 crore and ₹2 lakh.
Assuming excess spending can be carried back or set off without limit of manner.
The word 'set-off' is read loosely.
Fix: Set-off is against succeeding financial years only, for the number of years and in the manner prescribed.

Worked examples

Example 1

Alpha Industries Ltd is covered by Section 135. Its net profits computed under Section 198 for the last three financial years were ₹8 crore, ₹10 crore and ₹12 crore. It spent ₹15 lakh on CSR in the current year, none of it relating to an ongoing project. Compute the CSR obligation, the unspent amount and state the consequence.

Show the solution

Average net profit = (8 + 10 + 12) ÷ 3 = 30 ÷ 3 = ₹10 crore.
CSR obligation = 2% × ₹10 crore = ₹20 lakh.
Unspent amount = ₹20 lakh − ₹15 lakh = ₹5 lakh.
The unspent amount does not relate to an ongoing project, so the Unspent CSR Account route does not apply.
The Board must give reasons in its report under Section 134(3)(o), and transfer ₹5 lakh to a Fund specified in Schedule VII within six months of the expiry of the financial year.
Since the obligation is ₹20 lakh (not above ₹50 lakh), the CSR Committee need not be constituted and the Board performs its functions under Section 135(9).

Answer: Obligation ₹20 lakh; unspent ₹5 lakh, to be transferred to a Schedule VII Fund within six months of the financial year end, with reasons disclosed in the Board's report.

Example 2

Beta Ltd has a CSR obligation of ₹60 lakh for the year. It spent ₹45 lakh on an ongoing project that continues into the next year and ₹5 lakh on other activities. Advise on the treatment of the shortfall. The year ended on 31 March.

Show the solution

Total spent = ₹45 lakh + ₹5 lakh = ₹50 lakh.
Unspent amount = ₹60 lakh − ₹50 lakh = ₹10 lakh.
The conditions in the question show the shortfall relates to the ongoing project, so Section 135(6) applies. Assume the prescribed conditions for an ongoing project are met.
Beta must transfer ₹10 lakh to the Unspent Corporate Social Responsibility Account in a scheduled bank within 30 days from the end of the financial year, that is by 30 April.
It must spend this amount within three financial years from the date of transfer.
If any balance remains after that, it must transfer it to a Schedule VII Fund within 30 days from the date of completion of the third financial year.
If Beta defaults, the company is liable to a penalty of twice the amount required to be transferred or ₹1 crore, whichever is less. Twice ₹10 lakh is ₹20 lakh, so the penalty would be ₹20 lakh. Each officer in default faces one-tenth of ₹10 lakh, which is ₹1 lakh, or ₹2 lakh, whichever is less, so ₹1 lakh.

Answer: Transfer ₹10 lakh to the Unspent CSR Account by 30 April and spend within three financial years. On default, the company's penalty is ₹20 lakh and each officer in default's penalty is ₹1 lakh.

Exam tips

Show the Section 198 adjustments line by line when the question gives them. Marks follow the working.
Write the section numbers: 135(5) for the 2% spend, 135(6) for the Unspent CSR Account and 135(7) for penalties.
In case questions, first decide whether the project is ongoing. The whole answer turns on it.
Always end with a conclusion that gives the amount, the destination account or Fund, and the deadline.
Compute penalties as the lower of the two limits and show both figures.

Practice questions from Corporate Social Responsibility

CSR Expenditure and Unspent Amount in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA FinalCSR Expenditure, Schedule VII Activities and Unspent Amount

CSR Expenditure and Unspent Amount: frequently asked questions

How is the 2% CSR amount calculated?

Take net profit for each of the three immediately preceding financial years, computed under Section 198. Average them and take 2%. If the company has completed fewer than three years since incorporation, use the immediately preceding years it has completed.

What happens to unspent CSR money?

If it relates to an ongoing project, it goes to the Unspent CSR Account within 30 days of year end and must be spent within three financial years. Otherwise it goes to a Schedule VII Fund within six months of the end of the financial year. The Board must also give reasons in its report.

Can a company set off excess CSR spending?

Yes. If it spends more than required, it may set off the excess against the requirement for succeeding financial years. The number of years and the manner are as prescribed.

Is a CSR Committee always needed?

No. If the amount to be spent under Section 135(5) does not exceed ₹50 lakh, the Committee requirement does not apply and the Board discharges its functions.