What are the eligibility criteria for CSR in India?

Under Section 135(1) of the Companies Act, 2013, CSR rules apply to companies with net worth ≥ ₹500 Crore, turnover ≥ ₹1000 Crore, or net profit ≥ ₹5 Crore in the preceding financial year.

How much must a company spend on CSR?

Eligible companies must spend at least **2%** of their average net profits made during the three immediately preceding financial years.

What happens to unspent CSR funds?

Unspent funds for ongoing projects must be transferred to a special **Unspent CSR Account** (escrow bank account) within **30 days** of year-end. For other projects, transfer the unspent amount to a Schedule VII fund within **6 months** of year-end.

Are CSR expenses tax-deductible?

No. Under Section 37(1) of the Income Tax Act, CSR expenditures are not allowed as deductions for business expenses.

How do you account for unspent CSR in Tally Prime?

Debit the **CSR Expense** ledger and credit the **Provision for Unspent CSR** ledger using a journal voucher (F7). Transfer funds to the escrow bank ledger (F4 Contra).

CSR Compliance in India: Rules & Accounting

Corporate Social Responsibility (CSR) in India changed from a voluntary practice to a statutory obligation under Section 135 of the Companies Act, 2013.

Companies meeting the financial thresholds must establish a board-approved CSR committee, draft a policy, and spend 2% of their average net profits on approved projects.

1. CSR Project Categories and Deadlines

Unspent CSR funds are treated differently depending on the project type:

Project Type	Legal Definition	Unspent Fund Action	Statutory Transfer Timeline
Ongoing Projects	Multi-year projects (up to 3 years) with approved budgets	Transfer to a special Unspent CSR Escrow Account	Within 30 days of the financial year-end
Other Projects	Single-year projects completed within the financial year	Transfer to a Schedule VII fund (e.g. PM National Relief Fund)	Within 6 months of the financial year-end

2. Management Disputes and Administrative Expense Caps

Under Section 135 rules, administrative overheads incurred for CSR activities must not exceed **5%** of the total CSR expenditure of the company for the financial year.

Disagreements between management and auditors can occur when general office utility or salary expenses are allocated to CSR to meet the 2% spend target. Auditors verify that only direct, incremental overheads are capitalized or claimed under the 5% cap, and require reclassifications for non-compliant allocations.

3. CARO 2020 Clause (xx) Audit Reporting Rules

Under **Clause (xx) of CARO 2020**, statutory auditors must report on unspent CSR funds. The auditor checks that:

For non-ongoing projects, unspent amounts have been transferred to a Schedule VII fund within six months of year-end.
For ongoing projects, unspent balances have been transferred to a special Unspent CSR Escrow Account within 30 days of year-end.

Non-compliance with these rules triggers statutory penalties u/s Section 135(7) for the company and defaulting officers.

4. Case Study: Transferring Unspent CSR Funds

Let's analyze the CSR accounting for a manufacturing company:

Three-Year Average Net Profit: ₹10,00,00,000
Mandatory CSR Obligation (2%): ₹20,00,000
Actual Spending: The board spends ₹15,00,000 on school development during the year. The remaining ₹5,00,000 budget for the ongoing project remains unspent at year-end.
Reconciliation: The company must transfer the ₹5,00,000 unspent balance to a dedicated *Unspent CSR Escrow Account* within 30 days of March 31. The company has three years to spend this balance on the project.

Entry 1: Record Yearly CSR Liability (F7 Journal)
Debit:  CSR Expense Account (P&L)      ₹20,00,000
Credit: Provision for Unspent CSR (Liability)     ₹5,00,000
Credit: Main Bank Account (Actual Spent)          ₹15,00,000

Entry 2: Transfer Unspent Funds to Escrow Bank (F4 Contra)
Debit:  Unspent CSR Escrow Bank Account  ₹5,00,000
Credit: Main Bank Account                         ₹5,00,000

5. Forensic Audit Checks on CSR Implementing Agencies

Statutory rules require companies to execute CSR projects through registered implementing agencies holding active **Form CSR-1** registrations on the MCA portal.

Forensic auditors check that payments are not routed to shell NGOs or related parties, verifying that NGO registrations match the MCA database and actual project execution logs.

6. Tax Deductibility and Auditor Review

Under Section 37(1) of the Income Tax Act, CSR expenditures are not considered business expenses. Auditors verify that the ₹20,00,000 CSR expense debited to the profit and loss account is added back when calculating taxable income in the company's tax returns.

7. Setting Up CSR Ledgers in Tally Prime

To manage CSR allocations natively in Tally:

Tally CSR Ledger Setup:

Go to **Gateway of Tally > Create > Ledger**. Create **Unspent CSR Escrow Account** under **Bank Accounts**.

When paying vendors, select the escrow bank ledger, ensuring all disbursements are tracked for audit purposes.

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