Corporate Social Responsibility (CSR) is mandatory under Section 135 of the Companies Act, 2013 for companies meeting certain thresholds. As more firms commit to social responsibility, it becomes vital to know how the law treats such spending. But is CSR spending tax-deductible? The answer has been crystal clear since 2014 — and remains unchanged in 2025.
What is CSR and its legal mandate:
Corporate Social Responsibility (CSR) in India stems from Companies Act, 2013. Under Section 135, firms having net worth of ₹500 crore+, turnover above ₹1000 crore, or net profit over ₹5 crore must spend at least 2% of the average net profit (from past three years) on CSR activities.
These CSR activities cover areas such as education, health, environmental sustainability, rural development, and more — as listed in Schedule VII of the Act. Because the spending is mandatory under law, many wondered whether CSR outlays count as business expenses eligible for tax deduction.
When CSR‑Linked Expenditure May Be Deductible:
However, not all CSR expenditure is automatically non‑deductible. There are exceptions when CSR spending aligns with other deductible categories under the Income Tax Act. For example:
- If CSR funds are used for scientific research, and the recipient is an approved research institution or university, then under Section 35 (or Sections 30–36) such expense may be claimed as deduction.
- When a company donates to a charitable trust or fund registered under Section 80G of the Income Tax Act — and satisfies other eligibility conditions — the donation may be eligible for deduction under Section 80G.
For example, the Income Tax Appellate Tribunal (ITAT), Delhi Bench, recently held that mandatory CSR expenditure does not automatically disqualify deduction under Section 80G, so long as statutory conditions are satisfied. Thus, companies should examine the nature of each CSR activity and the status of the recipient institution to decide tax treatment carefully.
Why CSR expenditure is generally non‑deductible:
For tax computation under the Income Tax Act, 1961 (IT Act), companies can deduct business expenses only if incurred “wholly and exclusively” for business or profession. Section 37(1) allowed such deductions historically. However, with the Finance Act 2014, the law inserted an “Explanation 2” to Section 37(1), stating clearly: any expenditure on CSR under Section 135 of the Companies Act shall not be deemed to be incurred for business or profession.
Consequently, CSR expenditure is considered an “application of profit,” not a deductible expense. Many experts and tax commentators emphasise that such expenses are more in the nature of appropriation of profit, not business expenses. Therefore, as a rule, CSR spends cannot reduce a company’s taxable income under Section 37(1).
Strategic Tips for Businesses: Align CSR and Tax Efficiency
- Map every CSR activity to relevant sections of the Income Tax Act before booking for deduction. For example, if CSR involves scientific research or rural development, check for Sections 35 or 35C eligibility.
- When donating to charities or trusts, ensure the recipient has valid 80G registration and all donation receipts and certificates are obtained. This strengthens chances for deduction under Section 80G.
- Maintain detailed documentation — receipts, certificates, project reports. Deduction eligibility often depends on compliance with procedural formalities.
- Plan CSR separately from routine business expenses. Since CSR is “application of profits,” treat it as a separate compliance cost.
- Stay updated with legal judgements — tax courts occasionally rule on cases that affect CSR‑tax treatment (e.g. Section 80G eligibility).
Conclusion:
Understanding the tax treatment of CSR expenditure in India helps companies balance legal obligations with social responsibility. By planning CSR spending strategically, businesses can optimize compliance, enhance social impact, and improve corporate reputation. Explore more CSR and taxation insights now!
– Ketaki Dandekar (Tewam Arthology)
Read more about Tax Treatment of CSR Expenditure here – https://cleartax.in/corporate-social-responsibility