Spending more than required: setting off the excess

A company that spends more on CSR in a year than Section 135 of the Companies Act, 2013 requires can set off the excess: use it to reduce the amount it must spend in any of the next three financial years. The board must pass a resolution to do so, and the excess can’t include any surplus, the income that CSR projects themselves generate.

Set-off has been allowed since 22 January 2021. Before that, any amount spent above 2% was simply extra. It matters most to companies with lumpy spending: a big capital project in one year, a disaster appeal, or a multi-year commitment that runs ahead of plan.

This guide is for CSR heads and finance teams. It explains the rule, what counts as excess, how set-off works over three years, what happens if the company stops being covered, and the separate rule for surplus. It reflects the law as in force on 3 October 2026.

The rule

The MCA’s FAQs add two points:

• Only excess from 2020-21 onwards. Excess spent in earlier years can’t be carried forward (FAQ 3.7).
• Use it or lose it. Any excess not set off by the end of the three years lapses, even if the company is no longer covered by Section 135 (FAQ 3.8).

What counts as excess, and what doesn’t

The excess is the amount of admissible CSR expenditure above the year’s requirement. That means spending that would count towards the obligation in the first place. So these never create an excess:

• Surplus from CSR activities, such as interest an implementing agency earns on CSR funds, which Rule 7(3) excludes in terms.
• Administrative overheads above the 5% cap, which don’t count as CSR expenditure at all. See CSR budgets and overheads.
• Impact assessment costs above their limit of 2% of the year’s CSR expenditure or ₹50 lakh, whichever is higher.
• Things that were never CSR: corpus contributions, the value of employees’ volunteering time, goods given in kind at a notional value, and activities in the list of exclusions.
• Money disbursed but not yet used by an implementing agency, which the MCA doesn’t treat as spent (FAQ 7.4).
• Spending out of an Unspent CSR Account. That money belongs to an earlier year’s obligation and is reported separately in the annual report on CSR, so don’t count it towards the current year’s spending or excess.

How set-off works over three years

Keep a schedule for each year’s excess, because the annual report on CSR and Form CSR-2 ask how much was available, how much was used and what is left:

If Kaveri hadn’t used the last ₹20 lakh by the end of 2028-29, it would have lapsed. When excesses arise in several years, track each one separately, because each has its own three-year window.

If the company stops being covered

Coverage under Section 135 is tested afresh every year on the previous year’s figures, so a company can fall out of the rules and come back. The FAQs say unused excess lapses at the end of its three years “even if” the company is no longer covered (FAQ 3.8). In other words, falling out doesn’t wipe the excess, and it doesn’t extend the window either.

Surplus: what it is and where it must go

Surplus is income that CSR spending generates. The FAQs give three examples: interest an implementing agency earns on CSR funds, revenue a CSR project earns, and money from selling materials used in a project (FAQ 3.4). They add that surplus “shall be utilised only for CSR purposes”.

Surplus turns up more often than people expect: a tranche that earns interest before it is spent, a water project that charges a small user fee, a skills centre paid for a training contract, or scrap sold when a project closes. Each needs to be recorded and routed. Ploughing it back into the same project is the usual choice, and the CSR agreement should say so. See writing a CSR agreement.

How set-off and surplus appear in the reports

The annual report on CSR in the board’s report works out the year’s total obligation in three steps:

1. Two per cent of average net profit for the three preceding years. See calculating net profit for CSR.
2. Plus any surplus arising from earlier years’ CSR activities.
3. Minus any amount the board has resolved to set off this year.

It then reports any amount spent in excess, and Form CSR-2 asks for the set-off detail year by year. The figures in the board’s resolution, the annual report on CSR and Form CSR-2 must match.

Set-off and unspent money

Set-off and the rules for unspent money run in opposite directions, and they don’t cancel each other:

• Set-off reduces a future requirement. It can’t be used to excuse a shortfall in an earlier year, or reduce a transfer that is already due to an Unspent CSR Account or a Schedule VII fund.
• A shortfall must still be moved. If a company spends less than its reduced requirement in a set-off year, the gap follows the normal routes: the Unspent CSR Account within 30 days for ongoing projects, or a Schedule VII fund within six months.
• A transfer isn’t excess. Moving money into an Unspent CSR Account or a Schedule VII fund is how a shortfall is dealt with. It isn’t spending above the requirement, so it creates nothing to set off.

The CSR Law in Depth course works through surplus and set-off with further examples.