Environmental, Social and Governance (ESG) - Principles and Practice · Corporate Social Responsibility (CSR)

CSR Expenditure and Computation of Net Profit

Updated 11 October 2026 · Fact-checked

Under section 135(5), a company covered by section 135 must spend at least 2% of its average net profit of the three immediately preceding financial years on CSR. Net profit is worked out under section 198 with the CSR Rules adjustments. Excess spending can be set off in later years, and administrative overheads are capped at 5% of total CSR spend.

Understand CSR Expenditure and Computation of Net Profit

Section 135 does not leave the CSR amount to the Board's choice. Once a company meets the net worth, turnover or net profit threshold in section 135(1), its Board must ensure that the company spends at least two per cent of its average net profit on CSR in every financial year, under its CSR Policy.

The base is an average of the three immediately preceding financial years. A company that has not completed three financial years since incorporation uses the immediately preceding years it has. Using an average smooths out one-off good or bad years.

The next question is what counts as net profit. Section 135 says net profit is to be calculated in accordance with section 198, which is the same section used for managerial remuneration. It is not simply the profit shown in the Statement of Profit and Loss. Section 198 adds some items back and leaves out others. Once you have the section 198 figure for a year, the CSR Rules take out two more items: profit from overseas branches and dividends received from other Indian companies that are themselves covered by section 135 and comply with it.

Two further rules matter for the answer. First, if the company spends more than required, the excess can be set off against the requirement of succeeding years, as prescribed. Second, the CSR Rules limit administrative overheads to 5% of the total CSR expenditure of the financial year. The CSR Rules give these details, so name the CSR Rules, not a section, when you cite them.

The Board must also give preference to the local area and areas around it where the company operates. This is a proviso to section 135(5).

Key rules to remember

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.

How to solve CSR Expenditure and Computation of Net Profit questions

Use this order for any numerical or case question on CSR spending. It keeps the legal basis visible, which is what the examiner marks.

1Check applicability first. Under section 135(1), see whether net worth is ₹500 crore or more, turnover is ₹1,000 crore or more, or net profit is ₹5 crore or more in the immediately preceding financial year.
2Identify the three immediately preceding financial years. Do not include the current year. If the company is younger than three years, use the years completed.
3For each year, first fix the section 198 net profit. Start from the profit in the books. Add credit items such as subsidies. Remove items under section 198(3), such as capital profits and unrealised gains. Deduct the section 198(4) items that the books have not already charged. Add back section 198(5) items that the books have charged, such as income-tax. If a question gives a profit before tax with the section 198(4) deductions already made, treat it as the base for this step. It needs no tax adjustment.
4Then apply the CSR Rules exclusions to the section 198 figure: profit from overseas branches and dividend received from Indian companies that are covered by and comply with section 135.
5Add the three net profit figures, divide by three, and take 2%. If the three-year average is negative or nil, there is no amount to compute.
6Compare with actual spend. If spent less, state the consequence (unspent amount treatment). If spent more, apply the set-off conditions. Check that administrative overheads are within 5% of total CSR spend.
7Close with a conclusion sentence stating the required amount, the compliance position and the Board's disclosure duty in its report.

Quickest way: Table-and-average method

When to use it: Use it when a question gives three years of profit data with several adjustments and you have limited time.

Draw a three-column table, one column per year, with the book profit at the top.
Strike out the items that section 198(3) excludes and the CSR Rules exclude. Write each as a minus.
Add back section 198(5) items that the books have charged, such as income-tax. Deduct section 198(4) items that the books have not yet charged. Leave other items that are already charged and deductible alone.
Write the net profit per year, total them, divide by 3, and multiply by 0.02.
Compute 5% of the actual total CSR spend and compare it with overheads. Then compute spend minus obligation for the set-off.

Common mistakes in CSR Expenditure and Computation of Net Profit

Using the book profit or profit after tax as net profit.
Students forget that section 135 sends them to section 198, which has its own rules.
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.
The word 'average' makes students pick the latest three years that include the year of spending.
Fix: The statute says the three immediately preceding financial years. Use the years before the year in which the amount is spent.
Counting capital gains, share premium or unrealised gains in net profit.
They appear in the profit figure given in the question.
Fix: Remove them under section 198(3). Remember the exceptions: premium for an investment company, and fixed asset sale profit where the business is buying and selling such assets.
Calculating the 5% overhead limit on the 2% obligation instead of on total CSR expenditure.
Students link the two percentages without reading the base.
Fix: The cap is 5% of the total CSR expenditure of the financial year, under the CSR Rules. Base it on the actual spend.
Allowing set-off of any excess spend, with no conditions, or indefinitely.
The proviso to section 135(5) sounds general, and students treat it as the whole rule.
Fix: The proviso only allows set-off against succeeding financial years 'as may be prescribed'. The number of years and the conditions come from the CSR Rules: the excess must not come from ordinary-course activities, the CSR Committee must recommend it, the Board must approve it, and the Board's report must disclose it.
Forgetting the overseas branch and Indian-dividend exclusions.
These are in the CSR Rules, not in section 198.
Fix: Keep a standard list: section 198 adjustments plus the two CSR Rules exclusions.

Worked examples

Example 1

Suman Textiles Ltd, an Indian company, meets the net profit threshold of ₹5 crore or more in section 135(1), so section 135 applies to it. It has section 198 net profit of ₹8.8 crore for Year 1 and ₹6.2 crore for Year 2. For Year 3 it starts from a profit before tax of ₹12 crore. This figure is after all section 198(4) deductions and before any deduction for income-tax. It includes a capital profit of ₹1.5 crore on sale of an undertaking, an unrealised fair value gain of ₹50 lakh, profit of ₹1 crore from an overseas branch and a dividend of ₹20 lakh from an Indian company covered by and complying with section 135. These are the three immediately preceding years. Compute the Year 3 net profit and the CSR obligation of the current year.

Show the solution

Section 135 applies, because the company meets the net profit threshold of ₹5 crore or more in section 135(1). The Board must therefore ensure the 2% spend.
Start with the Year 3 profit before tax of ₹12 crore. It is already after the section 198(4) deductions. Section 198(5)(a) says income-tax is not deducted, so a pre-tax figure needs no adjustment for tax.
Remove the capital profit of ₹1.5 crore under section 198(3)(c).
Remove the unrealised gain of ₹50 lakh under section 198(3)(f).
The result is the Year 3 section 198 net profit. Now remove the overseas branch profit of ₹1 crore and the eligible dividend of ₹20 lakh under the CSR Rules exclusions.
Year 3 net profit = 12 − 1.5 − 0.5 − 1.0 − 0.2 = ₹8.8 crore.
Sum of the three years = 8.8 + 6.2 + 8.8 = ₹23.8 crore.
Average = 23.8 ÷ 3 = ₹7.9333 crore, about ₹7,93,33,333.
2% of the average = ₹7,93,33,333 × 0.02 = about ₹15,86,667.

Answer: Section 135 applies. The Year 3 net profit is ₹8.8 crore. The average net profit is about ₹7,93,33,333 and the minimum CSR obligation is about ₹15,86,667 (₹15.87 lakh).

Example 2

Kaveri Foods Ltd must spend ₹40 lakh on CSR in the current year. It actually spends ₹46 lakh on eligible CSR activities, of which ₹2 lakh is administrative overheads. Next year its obligation is ₹42 lakh. Examine the overheads limit and the set-off.

Show the solution

Total CSR expenditure of the year is ₹46 lakh.
The overhead cap under the CSR Rules is 5% of ₹46 lakh = ₹2,30,000.
Actual overheads of ₹2,00,000 are below ₹2,30,000, so the limit is met.
Excess spend = 46 − 40 = ₹6 lakh.
The proviso to section 135(5) allows the excess to be set off against the requirement of succeeding financial years as prescribed. Under the CSR Rules, this can be done for the number of succeeding years the Rules allow, provided the excess is not from activities in the ordinary course of business, the CSR Committee recommends it, the Board approves it and the Board's report discloses it.
If set off fully against next year, the next year's required spend is 42 − 6 = ₹36 lakh.

Answer: Overheads are within the 5% limit. The ₹6 lakh excess can be set off under the proviso to section 135(5), subject to the conditions in the CSR Rules. This would reduce next year's required spend to ₹36 lakh.

Exam tips

Show the section 198 adjustments line by line. Examiners award marks for each correct inclusion or exclusion, even if the final figure slips.
Write the legal basis in one line before computing: section 135(5) for the 2% and the three-year average, and the Explanation to section 135 for the section 198 link.
For overheads and set-off, cite the 'CSR Rules' by name. Do not quote a rule number unless you are certain of it.
In case-based questions, always close with the Board's duty: disclosure of reasons and of set-off in its report under section 134(3)(o) where relevant.
Watch the year base. If a question gives four years of data, pick the three before the current year.

Practice questions from Corporate Social Responsibility (CSR)

CSR Expenditure and Computation of Net Profit: frequently asked questions

How do I calculate the CSR obligation of a company?

Work out the net profit of each of the three immediately preceding financial years under section 198, adjusted by the CSR Rules. Add them, divide by three and take 2%. That is the minimum the Board must ensure is spent.

Is net profit for CSR the same as profit after tax?

No. Section 135 says net profit is calculated in accordance with section 198. Under section 198(5)(a), income-tax is not deducted, and capital profits and unrealised gains are excluded. So profit per books has to be adjusted.

Can excess CSR spending be carried forward?

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

What is the limit on administrative overheads in CSR?

The CSR Rules limit administrative overheads to 5% of the total CSR expenditure of the company for the financial year. The base is the actual total CSR spend, not the 2% obligation.