Understanding unspent CSR account: Rules & Compliance - HDFC Bank
17 March, 2025
Synopsis:
If a company fails to make the mandatory CSR expenditure within a financial year, it results in an unspent CSR amount.
The company must transfer the unspent amount to an unspent CSR account within 30 days from the end of the previous financial year.
Failing to transfer the unspent CSR amount within the stipulated deadline may attract a penalty of twice the unspent amount or ₹1 crore, whichever is lower.
Corporate Social Responsibility (CSR) is a statutory obligation for companies in India, governed by Section 135 of the Companies Act, 2013. This provision mandates that companies meeting specific financial thresholds allocate at least 2% of their average net profits from the last three years toward CSR activities. If the company has not completed three financial years since its incorporation, it must spend 2% of its average net profits made during the immediately preceding financial years as per its CSR policy. These activities should align with Schedule VII of the Act, covering areas such as education, healthcare, poverty alleviation, and environmental sustainability.
While companies are required to spend the prescribed CSR expenditure within a financial year, there are instances where they may fail to meet these obligations and possess unspent CSR amounts. To ensure accountability and prevent the diversion of these funds, the law mandates specific guidelines for handling unspent corporate social responsibility funds.
Understanding unspent CSR account
An unspent CSR account is a special account that companies must open in a scheduled bank to deposit their unspent corporate social responsibility funds related to ongoing projects. This requirement is stipulated under Section 135(6) of the Companies Act, 2013 and the Companies (CSR Policy) Rules, 2014.
The purpose of this account is to ensure that any unspent amount of CSR is utilized solely for CSR activities and not for any other corporate purposes. Companies must transfer the unspent CSR amount to this account within 30 days from the end of the previous financial year.
The company must name the account “Unspent Corporate Social Responsibility Account” along with the suffix of the financial year for which the unspent CSR amount has been parked and disclose the unspent amount under “current liabilities” in its balance sheet.
Compliance rules for unspent corporate social responsibility accounts
The Companies Act outlines clear rules regarding the management of unspent CSR funds:
For ongoing CSR projects
If a company has unspent CSR funds allocated for an ongoing project, it must transfer them to an unspent CSR account within 30 days from the end of the financial year. The amount must then be utilised within the next three financial years.
For non-ongoing CSR projects
If there is any unspent CSR amount unrelated to an ongoing project, the company must transfer it to a fund specified under Schedule VII of the Companies Act. These include the Prime Minister’s National Relief Fund and the Clean Ganga Fund, among others. The unspent CSR amount must be transferred within six months from the end of the financial year.
Disclosure requirements
Companies must disclose details of their unspent CSR account in their board reports, financial statements, website, and annual returns with the Registrar of Companies (ROC).
Penalty for non-compliance
If a company fails to transfer the unspent amount within the stipulated deadline, it faces a penalty of twice the unspent CSR amount or ₹1 crore, whichever is lower. Additionally, responsible officers may be penalised one-tenth of the required amount or ₹2 lakh, whichever is lower.
Best practices to handle CSR funds
To ensure compliance and effective utilisation of CSR funds, companies may follow these best practices:
Early identification of CSR projects: Companies should plan their CSR expenditure in advance and allocate funds strategically to avoid unspent CSR accounts.
Proper documentation: Maintain detailed records of the unspent CSR amount, including reasons for unspent funds and transfer details, to ensure transparency.
Strict monitoring of CSR initiatives: Regularly review CSR projects to ensure timely spending of funds and avoid accumulating unspent corporate social responsibility amounts.
Timely transfers to the unspent CSR account: Companies must promptly transfer the unspent CSR amount to be transferred to the appropriate account as per regulatory requirements.
Clear disclosure in financial statements: Ensure that the details of the unspent corporate social responsibility accounts are reported in financial statements, annual reports, and disclosures to the ROC.
CSR is more than just a statutory requirement. It is an opportunity for companies to contribute to social and environmental causes. However, failure to utilise CSR funds effectively leads to strict legal obligations regarding the unspent CSR amount. By understanding the rules governing unspent CSR accounts and following best practices, companies can ensure compliance while maximising the impact of their CSR initiatives. HDFC Bank allows companies to open an Unspent CSR Account and transfer Unspent CSR funds seamlessly.
FAQs
How is an unspent CSR fund managed?
Companies may transfer unspent CSR funds for an ongoing project into an unspent CSR account and use them within three years for ongoing CSR activities.
What is the deadline for transferring unspent CSR funds?
Companies must transfer the unspent CSR funds to an unspent CSR account within 30 days from the end of the previous financial year.
Is it possible to offset excess CSR spending against the CSR expenditure of the following financial years?
Yes, excess CSR spending can be offset against the mandatory 2% CSR expenditure for the following three financial years, provided it complies with the conditions outlined in Rule 7(3) of the Companies (CSR Policy) Rules, 2014. However, this offsetting of excess CSR spending is only applicable from 22 January 2021 onwards. Therefore, any excess amount spent in financial years prior to FY 2020-21 cannot be carried forward.
Should a company open a separate ’Unspent CSR Account’ for each ongoing project?
No, a company can open a single special account, called ‘Unspent Corporate Social Responsibility Account’, for a financial year in any scheduled bank, to transfer the unspent amount w.r.t ongoing project(s) of that financial year. A company needs to open a separate ’Unspent CSR Account’ for each financial year but not for each ongoing project.Can the amount transferred to ‘Unspent CSR Account’ of the company be utilised for regular business of the company?
No, the provisioning of a separate special account, namely the ‘Unspent CSR Account’, in any scheduled bank is to ensure that the unspent amount, if any, is transferred to this designated account and used only for meeting the expenses of ongoing projects, and not for other general purposes of the company. The special account cannot be used by the company as collaterals or creating a charge or any other business activity
Disclaimer: *Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.