Compliance Related to Unspent CSR Amount: Deposit, Transfer, or Spend? The Real Rules

For years, many companies treated Corporate Social Responsibility (CSR) spending as a “best-effort activity”, something to be explained in the Board’s Report if not entirely spent. That approach no longer works.

After the 2021 amendments to the Companies Act, 2013, unspent CSR amounts are no longer a disclosure issue; they are a transfer and timing issue. If companies fail to act within statutory deadlines, penalties are automatic, and directors can be held personally liable.

Yet, despite explicit legal provisions, CSR defaults remain common, primarily due to a misunderstanding of one fundamental question:
Should the unspent amount be spent later, transferred to a government fund, or parked in a separate CSR account?

This blog explains the actual legal framework, not assumptions, so companies can stay compliant and avoid MCA scrutiny.

Key Takeaways

• CSR is a mandatory statutory obligation, not a voluntary activity.
• Merely explaining unspent CSR in the Board’s Report does not complete compliance.
• Unspent CSR amounts follow two different legal paths, depending on whether they relate to an ongoing project.
• Missing transfer timelines can trigger financial penalties on both the company and its directors.
• Most CSR violations result from incorrect classification and poor documentation, not from malicious intent.

CSR Spending Obligation Under the Companies Act, 2013

Section 135(5) of the Companies Act, 2013 requires eligible companies to spend at least 2% of the average net profits of the preceding three financial years on CSR activities.

Key points to understand:

• Net profit is calculated as per Section 198, not as per P&L figures.
• The word “shall” indicates that CSR spending is legally compulsory.
• CSR is not a matter of management discretion or a charity decision.

The first proviso to Section 135(5) requires companies to explain unspent amounts in the Board’s Report.
However, this explanation alone does not satisfy compliance.

Why Explaining Unspent CSR Is No Longer Enough

Earlier, companies believed that if CSR was not spent, giving reasons in the annual report was sufficient. This interpretation is now incorrect.

Post-amendment:

• The law forces action, not just explanation.
• Every unspent amount must either be transferred or be ring-fenced for spending under strict timelines.

Failure to do so results in statutory default, even if the company later pays the amount.

Two Categories of Unspent CSR Amounts under the Law

The Companies Act creates two distinct compliance tracks for unspent CSR amounts. Failure to correctly classify the unspent amount is the root cause of most CSR defaults.

The two categories are:

• Unspent CSR amount not related to an ongoing project.
• Unspent CSR amount related to an ongoing project.

Each category has different statutory requirements and timelines.

1. Unspent CSR Amount Not Related to an Ongoing Project

If the unspent CSR amount does not relate to any ongoing project, the second proviso to Section 135(5) applies.

Legal Requirement

The company must transfer the unspent amount to a Schedule VII fund within six months from the end of the financial year.

Common Schedule VII Funds

• Prime Minister’s National Relief Fund.
• PM CARES Fund.
• Clean Ganga Fund.
• Any other fund notified by the Central Government.

Important: MCA adjudication orders clearly state that a late transfer remains a violation, even if the money is eventually paid.

Example :

ABC Ltd earned profits calculated as per Section 198 as follows:

• FY 2022–23: Rs 10 crore.
• FY 2023–24: Rs 7 crore.
• FY 2024–25: Rs 13 crore.

The average of the three preceding financial years is Rs 10 crore. The CSR obligation for FY 2025–26 is 2% of Rs 10 crore, i.e., Rs 20 lakh.

As of 31 March 2026:

• CSR required to be spent: Rs 20 lakh.
• CSR actually spent: Rs 8 lakh.
• Unspent CSR amount: Rs 12 lakh.
• Amount not related to any ongoing project: Rs 7 lakh.

The unspent amount of Rs 7 lakh must be transferred to a Schedule VII fund on or before 30 September 2026, which is six months from the end of the financial year.

2. Unspent CSR Amount Related to an Ongoing Project

When the unspent amount relates to an ongoing project, Section 135(6) applies.

What Qualifies as an Ongoing Project?

As per CSR Rules, 2014, the project must:

• Be approved by the Board.
• It will be a multi-year project.
• Have a defined timeline (maximum 3 years, excluding start year).

Mere continuation of activities without Board approval or a timeline does not qualify

What Companies Must Do for Ongoing Projects

1. Transfer the unspent amount to a separate bank account called
   “Unspent Corporate Social Responsibility Account”.
2. The transfer must be completed within 30 days of the end of the financial year.
3. Spend the amount within the next three financial years.
4. If still unspent after three years, transfer it to a Schedule VII fund within 30 days.

Example :

ABC Ltd has an unspent CSR amount of Rs 5 lakh at the end of FY 2025–26, which relates to an approved ongoing project.

• Rs 5 lakh must be transferred to the Unspent CSR Account on or before 30 April 2026.
• If the amount or any part of it remains unspent at the end of FY 2028–29.
• The unspent amount must be transferred to a Schedule VII fund on or before 30 April 2029.

Where Companies Commonly Fail

Despite explicit statutory provisions, CSR defaults commonly occur due to the following reasons:

• Failure to open the Unspent CSR Account within thirty days from the end of the financial year
• Treating informal continuation of activities as an ongoing project
• Absence of a proper Annual Action Plan as required under Rule 5 of the CSR Rules
• Weak or incomplete Board documentation
• Poor monitoring mechanisms for CSR activities
• These failures are procedural, but penalties are real.

Penalty Exposure under Section 135(7)

Failure to comply with Sections 135(5) or 135(6) attracts penalties under Section 135(7) of the Companies Act.

Penalty provisions are as follows.

For the company:

Twice the amount required to be transferred or one crore rupees, whichever is less

For officers in default:

One-tenth of the amount required to be transferred or two lakh rupees, whichever is less.

MCA adjudication orders clearly show that directors and compliance officers are routinely penalised, reinforcing that CSR compliance is not a soft governance area.

Conclusion

Compliance with CSR rules is no longer just about explaining unspent funds in the Board’s Report. Companies must act promptly to either spend the funds on approved projects or transfer them to government-designated funds within the prescribed timelines.

Correct classification of unspent amounts, proper documentation, and timely action are essential to avoid penalties for both the company and its directors. Following these rules ensures that CSR obligations are met effectively and legally, while contributing to social development.