How to Calculate Your CSR Obligation: The 2% Rule With a Worked Example
Step-by-step: how to work out the 2% CSR spend under Section 135 using average net profit, with an example and common mistakes to avoid.
Section 135 requires eligible companies to spend at least 2% of their average net profit from the three immediately preceding financial years. The rule is simple to state but easy to get wrong. Here is how to do it.
Step 1: Find net profit for each of the last three years
"Net profit" for CSR purposes is calculated under Section 198 of the Companies Act. That is not always the same as profit before tax in the financial statements. For CSR purposes:
- profits from overseas branches are excluded;
- dividends received from other Indian companies that are themselves covered by Section 135 are excluded.
Step 2: Take the average
Add the three years' net profits and divide by three. Loss years count as negative numbers in the average.
Step 3: Take 2%
The CSR obligation for the current year is 2% of that average.
A worked example
| Financial year | Net profit (Section 198) |
|---|---|
| FY 2022-23 | ₹180 crore |
| FY 2023-24 | ₹210 crore |
| FY 2024-25 | ₹240 crore |
| Average | ₹210 crore |
| CSR obligation for FY 2025-26 (2%) | ₹4.2 crore |
Adjustments to keep in mind
- Excess spending in earlier years can be set off against the obligation for up to three following years, if the board approves it.
- Administrative overheads may not exceed 5% of total CSR spending for the year.
- Surplus from CSR activities, such as interest earned on CSR funds, must be spent on CSR and does not count as part of the business's profit.
- Impact assessment costs can be counted as CSR, within limits (see our impact assessment guide).
Common mistakes
- Using profit before tax instead of Section 198 net profit.
- Using the current year instead of the three preceding years.
- Forgetting to transfer unspent money on time (see unspent CSR rules).
From number to plan
Once you know the amount, the harder question is how to spend it well. A ₹4 crore obligation can fund a meaningful three-year programme in a district where CSR is scarce. In Bihar, for example, 12 of 38 districts received less than ₹1 crore of CSR each in FY 2023-24.
General information only. Confirm calculations with your auditors.
