How to Calculate CSR Obligation in India (2025): A Startup’s Guide to Section 135 & 198 of the Companies Act

Corporate Social Responsibility (CSR) is no longer optional in India. Under the Companies Act, 2013, CSR compliance is a legal mandate for qualifying companies. India is the first country in the world to make CSR spending a statutory requirement, and if you’re a growing startup or MSME, understanding your CSR obligation is vital.

In this guide, we break down how to calculate your CSR obligation step-by-step using Section 135 and Section 198 of the Companies Act. Whether you’re new to CSR or nearing compliance thresholds, this startup-friendly guide will keep you compliant and community-focused.

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What Triggers CSR Compliance?

CSR becomes mandatory if your company, in the preceding financial year, meets any one of the following criteria under Section 135 of the Companies Act, 2013:

• Net worth of ₹500 crore or more
• Turnover of ₹1,000 crore or more
• Net profit of ₹5 crore or more

If any of these thresholds are crossed, you’re legally required to spend on CSR.

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How Much CSR Should You Spend?

Once CSR becomes applicable, your company must spend 2% of the average net profits of the last 3 financial years on CSR activities. The catch? This net profit must be calculated as per Section 198, not the typical P&L statement figure.

If your company is less than 3 years old, use the available years to calculate the average.

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Why Section 198 Profit Is Different from Net Profit in P&L

Your profit and loss statement might show a solid net profit, but the law requires adjustments to calculate “real” profits for CSR. Section 198 ensures CSR is based on genuine, recurring operational profits, not one-off gains, capital income, or foreign revenue.

This prevents companies from using accounting shortcuts or manipulating figures to avoid or reduce CSR obligations.

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Step-by-Step CSR Calculation Process

Step 1: Prepare Your Profit Data Table

Year	Net Profit (P&L)	+ Additions (Sec. 198)	– Deductions (Sec. 198)	Net Profit for CSR
2022–23
2023–24
2024–25

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Step 2: Add These (As per Section 198)

These items must be added back to net profit if not already in P&L:

• Government subsidies not shown in P&L
• Profit on sale of fixed assets (if transferred to reserves)
• Investment income excluded from P&L
• Transfers from reserves credited to P&L
• Compensation received from compulsory acquisition

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Step 3: Deduct These (As per Section 198)

The following must be deducted from your profit:

• Capital gains from asset or business sales
• Profits from foreign operations
• Dividend income from subsidiaries
• Tax provisions and deferred taxes
• Overwritten liabilities or prior-year profit adjustments
• Compensation paid due to compulsory acquisition (if debited to P&L)

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Step 4: Calculate Net Profit for CSR Each Year

Use the formula:

Net Profit for CSR = Net Profit (P&L) + Additions – Deductions

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Step 5: Compute 3-Year Average Net Profit

Average Net Profit = (Year 1 + Year 2 + Year 3) / 3

If your business is younger than 3 years, average the available years.

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Step 6: Calculate the 2% CSR Spend

CSR Obligation = Average Net Profit × 2%

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Example: CSR Calculation for a Growing Startup

Let’s assume the following net profits (after Section 198 adjustments):

Year	Net Profit for CSR
2022–23	₹6,00,00,000
2023–24	₹7,00,00,000
2024–25	₹5,00,00,000

Average Net Profit = ₹6,00,00,000
CSR Obligation = ₹6,00,00,000 × 2% = ₹12,00,000

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Special Guidelines for Startups and New Companies

• If your startup is less than 3 years old, use the average of available years only.
• If you spend more than the 2% requirement, you can carry forward the excess for up to 3 years.
• If you don’t spend the required amount:
  • Transfer to a government-approved public fund, or
  • Deposit in a CSR Escrow Account if the amount is earmarked for an ongoing project.

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CSR Compliance Checklist

1. Board’s Report must mention CSR applicability, spending, and impact.
2. File CSR-2 Form annually with the Ministry of Corporate Affairs.
3. Maintain documentation for:
   • CSR projects and timelines
   • Beneficiaries and vendors
   • Fund transfers and receipts
   • Board/CSR Committee approvals

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Why the CSR Law Is So Strict

The intent behind CSR regulation is to make real impact with real profits. By using Section 198 adjustments, the law ensures companies:

• Can’t use non-operational gains to fulfill CSR
• Promote transparency and long-term community development
• Contribute to the nation’s socio-economic goals with integrity

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CSR: Not Just Compliance—It’s a Brand Opportunity

When done right, CSR can be a powerful strategic lever for startups:

• Build a strong, responsible brand image
• Earn trust from investors, consumers, and communities
• Attract top talent with purpose-driven values
• Contribute to India’s development in education, health, environment, and more

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Conclusion: CSR Is Not Just Law—It’s Leadership

Understanding and calculating your CSR obligation in India is crucial if you’re scaling your business. With the right knowledge of Section 135 and Section 198, you can remain compliant, create impact, and build a brand that’s not just profitable—but purposeful.

Let CSR be more than a number. Let it be a narrative of growth and giving.