Calculating net profit for CSR (Section 198)

For CSR, “net profit” doesn’t mean the last line of the profit and loss account. It means profit before tax calculated under Section 198 of the Companies Act, 2013, and then reduced by two exclusions in the CSR Rules. Getting it wrong changes everything that follows: whether the company is covered at all, and how much it must spend.

Section 198 was written to calculate profits for capping directors’ pay under Section 197, and Section 135 borrows it. Its effect is to measure the profit a company earns from running its business, stripping out capital and paper gains. The CSR Rules then remove profits that are earned abroad or already carry a CSR obligation elsewhere in India.

This guide is for finance teams, company secretaries and CSR heads. It explains where the figure is used, what Section 198 adds and removes, the two CSR exclusions, a worked example, the common mistakes, and who should prepare and check the working. It reflects the law as in force on 3 October 2026.

Where net profit matters in CSR

The same net profit figure is used twice in Section 135:

• The coverage test. A company with a net profit of ₹5 crore or more in the immediately preceding financial year must spend on CSR this year, whatever its net worth or turnover. See which companies must spend on CSR.
• The obligation. A covered company must spend at least 2% of its average net profit for the three immediately preceding financial years, or for the years it has completed if it is younger. See how much a company must spend.

Net profit also appears in the company’s reports. The annual report on CSR states the average net profit and the 2% that follows from it, and Form CSR-2 asks for the build-up from profit before tax. A working you can’t reproduce is a working you can’t defend.

Why Section 198 and not the accounts’ profit

Accounting profit is built for investors. It includes gains that have nothing to do with running the business that year, such as a profit on selling a factory, or a gain from revaluing investments that hasn’t been realised. Section 198 removes most of those, so the figure reflects operating profit.

Three features matter most for CSR:

• It is before tax. Section 198 doesn’t deduct income tax on the company’s profits. Starting from profit after tax and applying 2% gives the wrong answer.
• Capital items are taken out both ways. Capital profits aren’t credited and capital losses aren’t deducted, with a narrow exception for assets sold below their written-down value (their book value after depreciation).
• Earlier losses are carried forward. If, in an earlier year, expenditure exceeded income when computed under Section 198, that excess is deducted from later years’ profits until it has been used up.

What Section 198 adds and removes

Section 198 works by listing what is credited, what isn’t, what is deducted and what isn’t. In plain words:

For most operating companies, only a few lines apply in a given year: typically capital gains or losses, fair value movements, and occasionally share premium. But the working should show that each line was considered.

The two CSR exclusions

Both exclusions have a clear logic:

• Overseas branches. Profits earned by the company’s branches abroad are left out of the base, which fits the rule that CSR money can’t be spent outside India, except on training Indian sports personnel.
• Dividends from complying Indian companies. A subsidiary or investee company that meets its own CSR obligation has already spent 2% of its profits. Excluding the dividend it pays stops the same profit being counted again in the parent. The exclusion applies only if the paying company is covered by Section 135 and complying with it. A dividend from a small Indian company outside Section 135 stays in.

Foreign companies with a branch or project office in India use the profit and loss account they prepare for their Indian business under Section 381(1)(a), read with Section 198.

Each company is tested on its own (FAQ 1.2), so the calculation uses the company’s own financial statements. Consolidated group profit isn’t the base, even for a holding company.

A worked example

Notice what the example doesn’t do. It doesn’t add back income tax, because it starts from profit before tax. And it doesn’t use the ₹62 crore headline figure, which would have given an obligation based on profits that Section 198 and the Rules leave out.

Common mistakes

• Using profit after tax, or taking tax off profit before tax. CSR uses profit before tax, computed under Section 198.
• Using group figures. Consolidated profit isn’t the base for any one company.
• Leaving in capital and paper gains. Gains on selling land, a business or shares, and unrealised revaluation gains, are left out.
• Applying the dividend exclusion too widely. It covers dividends only from Indian companies that are covered by Section 135 and complying with it.
• Forgetting earlier Section 198 losses. A loss computed under Section 198 in an earlier year can reduce later years’ net profit until it has been absorbed.
• Testing the wrong years. Coverage depends only on last year’s figures; the obligation averages the three preceding years.
• Not revisiting provisional figures. If the annual action plan is drawn up before the accounts are audited, recompute once the audited figures are in and record any change to the budget.

Who prepares and checks the figure

The law doesn’t name a person who must certify the CSR net profit calculation. In practice:

• The finance team prepares it, usually under the chief financial officer (CFO), as a working that starts from audited profit before tax and lists each Section 198 adjustment and each Rule 2(1)(h) exclusion.
• The CSR committee and the board rely on it. The committee recommends the amount to be spent, and the board approves it, so both should see the working, not just the answer. See the CSR committee.
• It goes into the company’s filings. The annual report on CSR states the average net profit and the 2% obligation, and Form CSR-2 asks for the build-up year by year.
• Auditors see the result. The notes to the financial statements must disclose the amount required to be spent on CSR, the amount spent and any shortfall, and the statutory auditor audits those statements. Consider asking your auditors to review the Section 198 working as well.

The CFO’s certificate under Rule 4(5) of the CSR Rules is a different document. It confirms that CSR money disbursed was used as the board approved; it isn’t a certificate of net profit.

Once you have the figure, the next steps are covered in how much a company must spend and, for companies that spend more than they must, setting off excess spending. The CSR Law in Depth course has more worked examples.