Deductions for Corporate Social Responsibility (CSR) Spending in India

What is Corporate Social Responsibility (CSR) in India?

In India, CSR is primarily governed by Section 135 of the Companies Act, 2013, and the Companies (Corporate Social Responsibility Policy) Rules, 2014. India was among the first countries to mandate CSR spending for certain companies. The law defines CSR as the activities undertaken by a company in pursuance of its statutory obligation. These activities must be listed in Schedule VII of the Companies Act. Schedule VII covers a broad range of areas, including:

• Eradicating hunger, poverty, and malnutrition
• Promoting education and healthcare
• Ensuring environmental sustainability
• Protection of national heritage
• Rural development projects
• Promotion of sports, and more.

Who is Mandated to Undertake CSR Spending?

The CSR provisions apply to companies that meet any of the following financial thresholds during the immediately preceding financial year:

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

If a company meets any of these criteria, it is required to:

• Constitute a CSR Committee of its Board of Directors.
• Formulate a CSR Policy.
• Spend at least 2% of its average net profits made during the immediately preceding three financial years on CSR activities. If a company has not completed three financial years since its incorporation, it should spend 2% of the average net profits made during the preceding financial years.

The General Rule: No Direct Tax Deduction for CSR Spending

This is the most critical point of clarification regarding deductions for corporate social responsibility (CSR) spending in India.

According to an amendment to Section 37(1) of the Income Tax Act, 1961, through the Finance (No. 2) Act, 2014, any expenditure incurred by an assessee on account of CSR activities referred to in Section 135 of the Companies Act, 2013, shall not be deemed to be an expenditure incurred by the assessee for the purposes of business or profession.

What does this mean? Essentially, general CSR expenses are not deductible as a normal business expenditure when calculating taxable profits. The tax authorities view CSR spending as an appropriation of profits (i.e., using profits for a specific purpose), rather than an expense incurred “wholly and exclusively for the purposes of the business” to earn revenue.

This implies that while companies are legally mandated to spend on CSR, they do not automatically receive a direct tax benefit for that spending under Section 37(1), unlike other business expenses (e.g., salaries, rent, advertising).

Specific Exceptions and Indirect Deductibility (Understanding the Nuance)

While the general rule is non-deductibility under Section 37(1), there are specific scenarios where certain CSR-related outlays might qualify for deductions under other sections of the Income Tax Act. It’s crucial to distinguish the nature of the expense from its CSR label.

1. Donations to Approved Funds/Institutions (Section 80G):
   • Many CSR activities involve making donations to charitable institutions or funds.
   • If a donation is made to an institution or fund that is approved under Section 80G of the Income Tax Act, then the company making the donation can claim a deduction for such donation. The deduction is typically 50% or 100% of the donated amount, subject to certain limits, as specified under Section 80G.
   • Example: A company spends ₹10 Lakhs on CSR by donating to a Prime Minister’s National Relief Fund (PMRF), which is approved under 80G. The company can claim a 100% deduction of this ₹10 Lakhs under Section 80G (subject to limits, if any, for specific funds).
   • Key Point: The deduction here is primarily due to the nature of the donation (qualifying under 80G), not solely because it is a CSR expense. If the CSR activity does not involve a donation to an 80G-approved entity, no deduction under 80G would apply.
2. Expenditure on Scientific Research (Section 35):
   • If a company’s CSR activity involves contributions to approved scientific research associations, universities, or colleges, these might be deductible under Section 35 of the Income Tax Act.
   • Example: A company sponsors a research project on renewable energy at an approved university as part of its environmental CSR. This could be deductible under Section 35, even though it also serves a CSR purpose.
3. Expenditure on Skill Development Projects (Section 35CCC/CCD – Phased out/Specific):
   • Historically, certain sections like Section 35CCC (for agricultural extension projects) and Section 35CCD (for skill development projects) provided weighted deductions. While some of these specific deductions have been phased out or are highly specific, the principle is that if a CSR activity inherently qualifies as an expense under another specific section of the IT Act (e.g., for certain types of rural development or skill development if specifically allowed), it might still be deductible under that specific section.
   • Current Status (2025): It’s essential to verify the current applicability and specific conditions of such specialized sections, as tax laws are dynamic. The general disallowance under Section 37(1) for CSR remains.
4. Expenses Incurred in the Ordinary Course of Business (Grey Area):
   • If an expenditure serves a dual purpose – being a genuine business expense AND having a CSR element – the tax treatment can be a grey area. For example, if a company builds a road to its factory that also benefits a local village, this might be viewed differently from a pure donation. However, the onus is on the taxpayer to prove it was incurred “wholly and exclusively for business.” Pure CSR is excluded.

In summary: A CSR expense is generally not deductible under Section 37(1). However, if the CSR activity, by its very nature, qualifies for a deduction under another specific section of the Income Tax Act (e.g., as a donation under 80G to an approved fund), then that specific deduction can be claimed.

Benefits of CSR Beyond Tax Deductions

Despite the limited direct tax deductibility, CSR spending offers immense benefits to businesses:

• Enhanced Brand Reputation: Demonstrating social responsibility builds a positive brand image and earns public trust.
• Improved Employee Morale & Retention: Employees often feel proud to work for socially responsible companies, leading to higher engagement and loyalty.
• Stronger Stakeholder Relations: Good CSR practices foster better relationships with local communities, government, and other stakeholders.
• Risk Mitigation: Proactive CSR can reduce regulatory risks and mitigate negative publicity from social or environmental issues.
• Long-Term Sustainability: Investing in social and environmental initiatives contributes to a more sustainable operating environment for the business.
• Access to Capital: Increasingly, investors (especially ESG-focused funds) consider a company’s CSR performance when making investment decisions.

Compliance and Reporting Requirements for CSR

Companies subject to CSR provisions must adhere to strict reporting mandates:

• CSR Committee & Policy: Establish a CSR Committee and formulate a comprehensive CSR policy, publicly disclosing it on the company’s website.
• Annual Report on CSR Activities: The Board’s report must include an annual report on CSR activities, detailing the amount spent, the projects undertaken, and reasons for any unspent amounts.
• Website Disclosure: Details of the CSR Committee, CSR policy, and projects approved by the Board must be displayed on the company’s website.
• Unspent Amount Handling: Any unspent CSR amount from the mandatory 2% must be transferred to a special account within 30 days of the end of the financial year, to be spent within 3 years. Otherwise, it must be transferred to specific government funds (like the National Unspent CSR Fund) within 6 months.

The Role of a CA in Managing CSR Spending

Navigating the intricacies of CSR obligations, particularly their tax implications, requires expert guidance. CA Sweta Makwana & Associates, your trusted tax advisor and compliance specialist for SMEs, startups & NRIs, offers invaluable support:

• Threshold Assessment: We help companies determine if they meet the mandatory CSR spending thresholds under Section 135 of the Companies Act.
• CSR Policy Drafting: We assist in formulating a robust CSR policy that aligns with legal requirements and the company’s objectives.
• Activity Eligibility: We advise on whether proposed CSR activities fall within Schedule VII of the Companies Act.
• Tax Implications Clarification: Crucially, we provide clear guidance on the tax deductibility of various types of CSR spending, distinguishing between non-deductible general CSR and specific deductions under sections like 80G.
• Compliance & Reporting: We ensure accurate reporting of CSR activities in the annual reports and compliance with all disclosure requirements.
• Accounting Treatment: We guide companies on the correct accounting treatment of CSR expenditures.

Conclusion

Corporate Social Responsibility is no longer merely a philanthropic gesture in India; it’s a legal mandate for eligible companies. While the spirit of CSR is about contributing to societal well-being, understanding the specific tax implications for deductions for corporate social responsibility (CSR) spending in India (2025) is vital for prudent financial management. The general rule is non-deductibility under Section 37(1), but specific exceptions, particularly donations to 80G-approved funds, can offer tax benefits.

Companies must integrate CSR into their strategic planning, not just as a compliance requirement, but as an opportunity to build long-term value and reputation. With expert guidance, businesses can ensure their CSR efforts are both impactful and financially sound.

For comprehensive assistance with your CSR obligations, tax planning, and corporate compliance, get in touch with CA Sweta Makwana & Associates today.

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For official details on the Companies Act, 2013, and CSR rules, refer to the Ministry of Corporate Affairs (MCA) website.