CSR rules: what changed in 2026.
When CSR fits in the year.
1. The CSR framework.
Corporate Social Responsibility under section 135 of the Companies Act, 2013 requires certain classes of companies to spend at least 2% of the average net profits of the immediately preceding three financial years on prescribed CSR activities. The framework is operationalised through the Companies (Corporate Social Responsibility Policy) Rules, 2014 and Schedule VII (the list of permitted CSR activities).
2. Applicability.
CSR provisions apply to every company (including its holding or subsidiary, and to a foreign company having branch / project office in India) which during the immediately preceding financial year had:
- Net worth of ₹500 Cr or more; or
- Turnover of ₹1,000 Cr or more; or
- Net profit of ₹5 Cr or more.
The thresholds are applied as standalone (not consolidated) financials for the standalone company. Once a company falls within the criteria, it remains subject to CSR until it fails to satisfy any of the thresholds for three consecutive years.
3. Computation: the 2% rule.
The CSR spend is 2% of the average net profits of the immediately preceding three financial years. Net profit for this purpose is computed under section 198 of the Act, which broadly aligns with profit-before-tax with specified exclusions (e.g. capital profits / losses, foreign-branch profits in certain cases). The section 198 computation is not the same as the income-tax computation or the disclosed profit before tax.
A company in its first three years of incorporation computes the spend on the average of however many preceding financial years are available.
4. Permitted CSR activities.
Schedule VII to the Act lists the permitted activities, which cover:
- Eradicating hunger, poverty and malnutrition; promoting health care including preventive health.
- Promoting education, employment-enhancing vocational skills, livelihoods.
- Promoting gender equality, empowering women, reducing inequalities.
- Ensuring environmental sustainability, ecological balance, animal welfare, conservation.
- Protecting national heritage, art and culture.
- Contributions to specified funds (PM National Relief Fund, PM CARES Fund, etc.).
- Rural development projects.
- Slum area development.
- Disaster management.
- Contribution to incubators / R&D projects in specified categories.
The list has been expanded over the years; the current Schedule VII should be referenced for any new CSR plan. Activities not listed in Schedule VII are not CSR-eligible.
5. Unspent CSR accounts.
Where the obligated company is unable to spend the CSR amount in the year:
- If the unspent amount relates to an ongoing project: transferred to a separate "Unspent CSR Account" of the company within 30 days from the end of the financial year, and to be spent within the next three financial years.
- If the unspent amount does not relate to an ongoing project: transferred to a fund specified in Schedule VII within six months from the end of the financial year.
The unspent CSR amount is not waived or written off. The mechanism enforces the cumulative obligation.
6. Recent amendments.
The CSR framework has been amended periodically. Key recent themes:
- Tighter monitoring of CSR through impact assessment for larger projects (typically ₹1 Cr or more) and through registration of implementing agencies.
- Mandatory registration on the MCA portal of any implementing agency through which CSR is routed.
- Disclosure of the impact assessment in the board's report and in the company's annual return on CSR (Form CSR-2).
- Treatment of administrative overheads (typically capped at 5% of the total CSR spend) and capital expenditure on creating long-term CSR assets.
- Penalty framework for non-compliance.
Each amendment cycle adjusts thresholds, disclosures and implementation rules. The specific amendments applicable to any year should be confirmed with reference to the current notifications.
7. Reporting and disclosure.
CSR reporting comprises:
- Annexure to the board's report. Brief on CSR policy, composition of CSR committee, financials of CSR spend, projects undertaken, and the reasoning for any shortfall.
- Annual report on CSR. Form CSR-2, filed annually with MCA, providing detailed CSR data.
- Disclosures in the financial statements. Including the CSR spend, unspent amount, transfer to unspent CSR account, transfer to specified funds.
- Impact assessment report. Where applicable (projects above the threshold), to be uploaded on the company website and disclosed in the board's report.
The most common reporting errors we encounter: (a) inconsistent reconciliation between the section 198 net profit and the CSR computation, (b) incorrect classification of CSR spend in the financial statements, (c) failure to transfer the unspent amount within the prescribed timeline, (d) missing impact-assessment disclosures, and (e) implementation through unregistered agencies post the registration requirement.
Frequently asked
Is the CSR spend tax-deductible?
CSR spend is generally not deductible as a business expense under section 37 of the IT Act (carried into the 2025 Act). Specific contributions (to certain funds) may be eligible for deduction under sections 80G or otherwise; the position on each contribution should be confirmed with reference to the current Act and notifications.
What is section 198 net profit and how does it differ from profit before tax?
Section 198 of the Companies Act, 2013 provides a formula for computing net profit, which begins with profit-before-tax and adjusts for items such as capital profits / losses, foreign branch profits in certain cases, and specified other items. The section 198 profit is therefore distinct from book profit, income-tax profit, or disclosed profit before tax.
Can a company implement CSR through a subsidiary or a related trust?
Yes, subject to the trust being registered as a CSR implementing entity on the MCA portal and meeting the prescribed conditions (typically constituted for charitable purposes, having appropriate track record, etc.). Implementation through unregistered agencies is no longer permitted.
What is the penalty for not spending the CSR obligation?
The Act provides for monetary penalty on the company (up to specified amounts) and on the officers in default. The unspent amount must still be transferred to the unspent CSR account or to a Schedule VII fund as the case may be; the penalty is additional, not a substitute.
Is administrative cost of running the CSR programme allowable as CSR spend?
Administrative overheads (typically including personnel cost, office expense, monitoring cost) are allowable up to a cap (typically 5% of the total CSR expenditure for that financial year). The cap is computed annually.
