Section 135 CSR spend calculation, explained
The 2% rule, in plain language
Once a company is subject to Section 135 — by crossing the net worth, turnover, or net profit threshold — its core obligation is simple to state and less simple to compute: spend at least 2% of average net profit, averaged over the three preceding financial years.
The word doing the work is "net profit" — as defined under Section 198, not the figure in the statutory P&L. The two numbers are usually close but rarely identical, and that gap is where CSR-budgeting errors start. If the company is younger than three years, the average uses the shorter period since incorporation.
How "average net profit" is actually computed
Section 198 sets out a specific method for calculating net profit for managerial remuneration and CSR purposes — distinct from accounting profit and from taxable profit under the Income Tax Act.
At a high level, the computation starts from profit before tax and applies specified additions and exclusions. Without a full ledger walkthrough — that belongs with your CA/CS, since the adjustments are numerous and fact-specific — the broad shape is:
- Certain credits are excluded — e.g., capital profits beyond what's specifically permitted, and certain dividend income from other Indian companies
- Certain deductions are added back or excluded, differing from accounting or tax treatment
- The result is usually close to, but not identical to, the profit-before-tax line in the audited financials
Because this directly determines a statutory spend obligation, it's squarely a job for your CS or CA, done once a year alongside the audited financials — treat this page as orientation, not a substitute.
A simplified worked example
This is an illustration, not a template
These figures are invented purely to show how the arithmetic flows once Section 198 net profit is already known. Have your CA/CS perform the real computation rather than substituting these numbers.
| Financial year | Section 198 net profit (illustrative) |
|---|---|
| FY 2023–24 | ₹42 crore |
| FY 2024–25 | ₹48 crore |
| FY 2025–26 | ₹45 crore |
| Average of three preceding FYs | ₹45 crore |
| CSR obligation for FY 2026–27 (2% of average) | ₹90 lakh |
Here, the company must spend at least ₹90 lakh on Schedule VII-aligned activities during FY 2026–27 and disclose the computation in its board report. If spend falls short, the unspent-amount rules in our CSR compliance checklist apply.
What counts vs what doesn't
Activities must fall within the categories listed in Schedule VII to qualify as CSR spend. Beyond that, certain kinds of spending are explicitly excluded even if they superficially resemble CSR activity.
| Generally counts as CSR spend | Generally does not count |
|---|---|
| Projects aligned to a Schedule VII category (education, health, livelihoods, environment, rural development) | Activities in the normal course of business |
| Spend routed through a Form CSR-1 registered implementing agency | Activities benefiting only the company's own employees and families |
| Capacity-building of CSR/implementing-agency personnel, within prescribed limits | Contributions, direct or indirect, to a political party |
| Impact assessment costs, within the prescribed cap, where mandated | Activities outside India, except narrow exceptions (e.g., training Indian sports personnel) |
| Administrative overheads within the 5% cap | Overhead costs in excess of the 5% cap |
The "normal course of business" exclusion trips up companies most often when their CSR programme sits close to their operating footprint — the programme must not simply subsidise the company's own supply chain or customer base.
Set-off of excess spend and the 5% admin cap
Set-off of excess CSR spend
If a company spends more than required in a given year, the excess can be set off against required expenditure for up to the three immediately succeeding financial years, provided it's reported to and approved by the board. Useful for front-loaded flagship projects, but not automatic — it must be tracked.
The 5% administrative overhead cap
Administrative overheads — running the CSR function itself, distinct from programme costs — are capped at 5% of total CSR expenditure under current rules. Costs beyond this cap cannot be counted as CSR spend.
Unspent rules, in brief
If spend falls short, the shortfall must be transferred out — to a dedicated Unspent CSR Account within 30 days of financial year end (ongoing project, three further years to spend it down), or directly to a Schedule VII fund within 6 months (no ongoing project). Missing these deadlines carries penalties under Section 135(7). Full details, including exact penalty figures, are in our CSR compliance checklist.
Common mistakes in calculating and applying the 2% rule
⚠ Counting employee-benefit spending as CSR
Spending that benefits only the company's own employees and families does not qualify, however worthy — a frequent misclassification in companies with strong internal welfare programmes.
⚠ Counting normal business activities as CSR
A company cannot count spend on improving its own supply chain or customer-facing services as CSR, even where it has genuine social benefit as a side effect.
⚠ Missing the Unspent CSR Account deadline
The 30-day window falls right at financial year-end close and is the single most commonly missed CSR deadline. Give it its own line on the year-end calendar.
⚠ Treating administrative overheads loosely
Overhead beyond the 5% cap doesn't count as CSR spend — including it anyway overstates reported expenditure and creates a disclosure discrepancy that surfaces on audit.
Getting the Section 198 base right and tracking set-off/admin-cap use from day one keeps a programme defensible on review. For the outcomes side of the story, Mujanti's SROI calculator helps translate results into a figure boards engage with easily.
Need help getting the CSR budget right?
Mujanti works with CSR and finance teams to align the Section 198 computation, the annual CSR budget, and disclosure paperwork — so the board report matches what was actually spent.
Book a free 30-minute consultationThis guide reflects Sections 135 and 198 of the Companies Act, 2013, and the CSR Rules as amended, current as of July 2026. CSR rules are amended frequently — verify current thresholds, caps, and figures against the latest MCA notifications, and have your CA/CS perform the actual Section 198 computation. This article is general information, not legal, tax, or accounting advice.