CSR budgets, tranches and the 5% overhead cap

A company’s administrative overheads, the general costs of running its CSR function, can’t exceed 5% of its total CSR expenditure for the financial year. That is Rule 7(1) of the Companies (CSR Policy) Rules, 2014 (the CSR Rules). The cap covers only the company’s own general management of CSR: the costs of designing, implementing, monitoring and evaluating a particular project are project costs.

This guide explains the cap, sorts common costs into overheads and project costs, explains how implementing agencies’ own costs are treated, and shows how to build a project budget and a tranche plan. It is for CSR and finance teams, and for NGOs budgeting CSR projects, who should also read budgeting a proposal.

What the rules say

Three details matter:

• The base is what the company actually spends, not its obligation. A company that spends ₹6 crore can count up to ₹30 lakh of overheads; one that spends ₹8 crore, up to ₹40 lakh.
• Overheads are part of total CSR expenditure. Of ₹6 crore spent, at least ₹5.7 crore must go on projects and other eligible spending.
• Anything above the cap isn’t CSR spending. It is an ordinary business cost, and the obligation must still be met from eligible spending.

What counts as an overhead

The FAQs add that expenses “attributed to the project implementation shall be included in project cost only” (FAQ 3.2, General Circular 14/2021). If a member of your CSR team works directly on one project, the part of their cost directly incurred on it can be a project cost, so keep time records that show the split and agree the method with your auditors.

Impact assessment has its own limit. A company that must commission one, because its average CSR obligation is ₹10 crore or more, can count the cost as CSR spending up to 2% of the year’s total CSR expenditure or ₹50 lakh, whichever is higher (Rule 8(3)(c), since 20 September 2022). The limit is separate from the 5% cap. The FAQs, from August 2021, still describe the old limit, so don’t rely on them for this. See impact assessment.

The implementing agency’s own costs

When an NGO runs a project, its costs fall into two groups:

• Costs directly attributable to the project, such as programme staff, materials, training, field travel, data collection and monitoring. These are project costs.
• The agency’s general running costs, such as a share of its chief executive, finance team, audit, office and systems.

The FAQs deal with the second group in one sentence, worth reading exactly:

So these costs don’t count against the company’s 5% cap. What “cannot be claimed by the company” means is less clear. One reading is simply that the company can’t book them as its own overheads, so a fair share of the agency’s running costs, allocated to the project, can sit in the project budget. A stricter reading is that the company can’t count an agency’s general management costs as CSR spending at all, only costs directly attributable to the project. Because the wording supports both, treat it as a decision to make with your auditors:

• Agree the treatment before the year starts, and write it into the annual action plan and the agreement.
• Ask the agency to show its running costs as a separate, explained line, with how they are allocated, rather than hiding them in programme lines.
• Don’t starve partners. No law caps an NGO’s overheads from domestic money, and underfunding them pushes NGOs to underpay staff and skip audits, which makes them riskier partners, not safer ones.
• Mind foreign money. If the funds are foreign contribution under the Foreign Contribution (Regulation) Act, 2010, the agency’s administrative expenses from them can’t exceed 20% of the contribution (section 8).

Building a project budget

Build costs from units, such as cost per trainee or per session, not round totals, and compare cost per participant across similar projects. For an ongoing project, split the budget by financial year: the board monitors it against a year-wise allocation (Rule 4(6)), and the project can’t run beyond three years after the year it starts. Name the holder of any capital asset in the budget notes; see capital assets in CSR.

Designing tranches

Tranches control risk for the company and cash flow for the agency. The rule that shapes them is FAQ 7.4: “mere disbursal of funds for implementation of a project does not amount to spending unless the implementing agency utilises the whole amount”. The FAQ asks companies to release money “in such a manner so that they can be utilised by them during the financial year”.

• Front-load enough to start, because hiring and set-up costs come first.
• Link later tranches to milestones and a utilisation certificate for the previous tranche.
• Avoid big releases late in the year unless the money will genuinely be used by 31 March.
• For multi-year projects, match tranches to each year’s allocation, so each year’s spending is clear.

Interest, surplus and set-off

Interest an agency earns on CSR funds, revenue a project earns and money from selling project materials are surplus (FAQ 3.4). Under Rule 7(2), surplus can’t become business profit. It must be ploughed back into the same project, moved to the Unspent CSR Account and spent under the CSR policy and annual action plan, or transferred to a Schedule VII fund within six months of the year-end.

• Ask agencies to report interest in every utilisation statement, and say in the agreement how it will be used, usually in the same project.
• Surplus can’t create a set-off. A company that spends more than its obligation can, by board resolution, set the excess off against the next three years’ obligations, but not the part that came from surplus (Rule 7(3)). See setting off excess spending.
• Unspent money can’t be held as a reserve. At the year-end it goes to the Unspent CSR Account (for ongoing projects) or a Schedule VII fund, so keep contingencies small and inside the year.

A worked budget for a year