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Strategic Management and Corporate Finance · Raising of Funds - Private Funding

Section 181: Contribution to Bona Fide and Charitable Funds

Updated 11 October 2026 · Fact-checked

Section 181 lets a company's Board contribute to bona fide charitable and other funds. If the total contributions in a financial year exceed 5% of the company's average net profits for the three immediately preceding financial years, prior permission of the company in general meeting is required.

Understand Contribution to Bona Fide and Charitable Funds (Section 181)

A company is a commercial entity, but it may still want to give money to charitable causes. Section 181 gives the Board of Directors the power to contribute to bona fide charitable and other funds. No shareholder approval is needed for ordinary contributions.

The power has a limit. The proviso says prior permission of the company in general meeting is needed if the aggregate of the contributions in any financial year exceeds five per cent of its average net profits for the three immediately preceding financial years. The test is on the total for the year, not on each single gift.

The word prior matters. The members must approve before the contribution is made. Approval after the event does not satisfy the proviso.

Do not mix Section 181 with Section 135 (CSR). Section 135 applies only to companies that meet the net worth, turnover or net profit thresholds. It requires a CSR Committee, a CSR Policy and spending of at least 2% of average net profits on Schedule VII activities. Section 181 is an enabling power with a ceiling that the Board can use without members' approval. It does not create a duty to spend.

Also note Section 183. It allows the Board, or the company in general meeting, to contribute to the National Defence Fund or any other Fund approved by the Central Government for national defence, notwithstanding Section 181. So the 5% limit does not restrict such contributions. The company must disclose the total amount in its profit and loss account.

Key rules to remember

Board's ceiling under Section 181
Limit = 5% × (Net profit of year 1 + year 2 + year 3) ÷ 3
Years are the three immediately preceding financial years. Contributions above this limit in a financial year need prior approval of the company in general meeting.
Rule for approval
Aggregate contributions in a financial year ≤ limit → Board can decide; > limit → prior permission in general meeting
The proviso refers to the aggregate in any financial year that exceeds the limit. Contributions equal to the limit do not exceed it.
Section 135 CSR minimum spend (for comparison)
CSR spend ≥ 2% × average net profits of the three immediately preceding financial years
Applies only to companies covered by Section 135(1). Net profit is calculated under Section 198, with sums as prescribed excluded.
Section 183 exception
Contributions to National Defence Fund or Central Government-approved defence fund: no Section 181 limit
The company must disclose the total in its profit and loss account.

How to solve Contribution to Bona Fide and Charitable Funds (Section 181) questions

Use this method for any question on contributions to charitable funds, whether it is a calculation or a case on authority.

  1. 1Identify the nature of the recipient. Is it a bona fide charitable or other fund (Section 181), a national defence fund (Section 183), or a CSR activity under Schedule VII (Section 135)?
  2. 2Identify the three immediately preceding financial years. Do not include the current year.
  3. 3Compute the average net profit of those three years. If any year has a loss, include it as a negative figure, and note any assumption you make.
  4. 4Multiply the average by 5% to get the Section 181 limit.
  5. 5Add all contributions made or proposed in the financial year. Compare the aggregate, not individual gifts, with the limit.
  6. 6If the aggregate exceeds the limit, state that prior permission of the company in general meeting is required. Otherwise the Board may approve it.
  7. 7Write the conclusion in one line, quoting the rule and any practical step such as a Board resolution, a notice of general meeting and a disclosure.

Quickest way: Three-line check for Section 181

When to use it: Use when the question gives profit figures and asks whether the members' approval is needed.

  1. Average the net profit of the last three years, then take 5%.
  2. Total all contributions of the financial year and compare with that figure.
  3. If the total is more, write: prior general meeting permission needed. If not, write: Board alone can approve.

Common mistakes in Contribution to Bona Fide and Charitable Funds (Section 181)

  • Using the current year's profit to compute the 5% limit.

    Students assume the profit of the year of contribution is the base.

    Fix: Use the average net profit of the three immediately preceding financial years only.

  • Comparing each donation separately with the limit.

    Students read the proviso as applying to each contribution.

    Fix: The proviso refers to the aggregate in a financial year. Add all contributions first.

  • Treating Section 181 as the CSR provision.

    Both deal with money given for social purposes and both use average net profits.

    Fix: Section 135 is a mandatory CSR spend of at least 2% for covered companies on Schedule VII activities. Section 181 is only an enabling power with a 5% threshold for members' approval.

  • Saying approval in general meeting can be taken after the contribution.

    Students overlook the word prior in the proviso.

    Fix: State clearly that prior permission is needed for contributions above the limit.

  • Applying the 5% limit to contributions to the National Defence Fund.

    Students forget Section 183 overrides Section 181.

    Fix: Section 183 allows such contributions notwithstanding Section 181. Remember to disclose the total in the profit and loss account.

Worked examples

Example 1

Sunrise Textiles Ltd. had net profits of ₹4,20,00,000, ₹3,00,00,000 and ₹5,40,00,000 in the three immediately preceding financial years. In the current year the Board proposes to contribute ₹7,00,000 to a bona fide charitable trust and ₹5,00,000 to a medical relief fund. Is approval of members required under Section 181?

Show the solution
  1. The three preceding years' profits total ₹4,20,00,000 + ₹3,00,00,000 + ₹5,40,00,000 = ₹12,60,00,000.
  2. Average net profit = ₹12,60,00,000 ÷ 3 = ₹4,20,00,000.
  3. Section 181 limit = 5% × ₹4,20,00,000 = ₹21,00,000.
  4. Aggregate proposed contributions = ₹7,00,000 + ₹5,00,000 = ₹12,00,000.
  5. ₹12,00,000 does not exceed ₹21,00,000.

Answer: No. The aggregate of ₹12,00,000 is below the limit of ₹21,00,000, so the Board can approve the contributions without prior permission of the company in general meeting.

Example 2

Greenfield Pharma Ltd. had average net profits of ₹8,00,00,000 over the three immediately preceding financial years. During the year the Board has already contributed ₹25,00,000 to a charitable fund and now proposes another ₹20,000,00 contribution... Correct the figure: it proposes another ₹20,00,000 to a bona fide relief fund. Advise the company.

Show the solution
  1. Section 181 limit = 5% × ₹8,00,00,000 = ₹40,00,000.
  2. Aggregate for the financial year if the new contribution is made = ₹25,00,000 + ₹20,00,000 = ₹45,00,000.
  3. ₹45,00,000 exceeds ₹40,00,000.
  4. The proviso requires prior permission of the company in general meeting where the aggregate in a financial year exceeds the limit.
  5. The company should therefore hold a general meeting, or obtain the permission through a resolution, before making the further contribution.

Answer: Prior permission of the company in general meeting is required, because the aggregate of ₹45,00,000 would exceed the limit of ₹40,00,000. The Board should not make the further ₹20,00,000 contribution until the members have approved it.

Exam tips

  • Write the rule first: the Board may contribute, and members' prior permission is needed above 5% of the average net profits of the three preceding years.
  • In case questions, show the average and 5% calculation line by line. Marks are given for method.
  • Add a short comparison with Section 135 whenever the question mentions social responsibility or charity.
  • Mention Section 183 if the facts involve a national defence fund.
  • Close with a clear conclusion on whether general meeting approval is needed.

Practice questions from Raising of Funds - Private Funding

Contribution to Bona Fide and Charitable Funds (Section 181): frequently asked questions

What does Section 181 of the Companies Act, 2013 provide?

It allows the Board of Directors to contribute to bona fide charitable and other funds. If the aggregate of such contributions in a financial year exceeds 5% of the average net profits of the three immediately preceding financial years, prior permission of the company in general meeting is required.

What is the difference between Section 181 and Section 135?

Section 135 makes CSR spending mandatory, at least 2% of average net profits, for companies meeting the net worth, turnover or net profit thresholds. Section 181 only empowers the Board to contribute to charitable funds and sets a 5% level above which members' approval is needed. Section 181 applies to any company.

Does the 5% limit apply to contributions to the National Defence Fund?

No. Section 183 allows the Board or the company in general meeting to contribute any amount it thinks fit to the National Defence Fund or another Central Government-approved defence fund, notwithstanding Section 181. The total must be disclosed in the profit and loss account.

Which years are used to find the average net profit under Section 181?

The three financial years immediately before the financial year in which the contribution is made. The current year is not included.