What Is CSR Under the Companies Act, 2013?
Corporate Social Responsibility (CSR) under Section 135 is a mandatory legal requirement for eligible companies to spend at least 2% of their average net profits (of the preceding three financial years) on approved social, environmental, and developmental activities listed in Schedule VII of the Act. India was the first country in the world to mandate CSR spending through legislation — making it a legal obligation rather than a voluntary corporate initiative.
Since CSR became effective from April 1, 2014, Indian companies have collectively spent over Rs. 1.5 lakh crore on CSR activities — funding education, healthcare, sanitation, rural development, environment protection, and skill development programs across the country.
Which Companies Must Comply with CSR?
Section 135(1) applies to every company (private, public, listed, foreign with Indian operations, Section 8, holding, subsidiary) that meets ANY ONE of these thresholds in the immediately preceding financial year:
| Criterion | Threshold |
|---|---|
| Net worth | Rs. 500 crore or more |
| Turnover | Rs. 1,000 crore or more |
| Net profit | Rs. 5 crore or more |
Meeting even ONE criterion triggers CSR applicability. Once triggered, the company must comply for that year — even if it falls below the threshold next year (CSR applicability is assessed annually). If the company falls below ALL thresholds for 3 consecutive years: CSR committee can be dissolved and CSR provisions cease to apply.
CSR Committee — Constitution and Role
Every CSR-eligible company with CSR obligation of Rs. 50 lakh or more must constitute a CSR Committee of the Board with:
(a) Minimum 3 directors (for companies with 3+ directors)
(b) At least 1 independent director (for companies required to have independent directors)
(c) For private companies with only 2 directors: both directors on the CSR Committee
(d) For companies with CSR obligation below Rs. 50 lakh: CSR Committee is NOT required — the Board directly performs CSR functions
CSR Committee responsibilities:
(a) Formulate and recommend CSR Policy to the Board
(b) Recommend the amount of CSR expenditure
(c) Monitor the CSR Policy implementation
(d) Approve the Annual Action Plan for CSR activities
How to Calculate 2% CSR Spending
Step 1: Calculate net profit as per Section 198 of the Companies Act (not as per P&L statement). Section 198 requires specific adjustments — exclude capital payments/receipts, profits on sale of fixed assets (unless business), income tax provision, and set-off past losses.
Step 2: Calculate average net profit of the three immediately preceding financial years. For companies less than 3 years old: average of available years.
Step 3: 2% of average net profit = minimum CSR obligation.
Example: Company's net profit (Section 198): FY 2022-23: Rs. 8 crore, FY 2023-24: Rs. 12 crore, FY 2024-25: Rs. 10 crore. Average = Rs. 10 crore. CSR obligation for FY 2025-26 = 2% of Rs. 10 crore = Rs. 20 lakh.
Schedule VII — Eligible CSR Activities
CSR spending must be on activities listed in Schedule VII (not anything the company considers social). The 12 broad categories include:
(i) Eradicating hunger, poverty, malnutrition; promoting healthcare and sanitation
(ii) Promoting education, skill development, livelihood enhancement
(iii) Gender equality, women empowerment, old age homes, orphanages
(iv) Environmental sustainability, ecological balance, conservation
(v) Protection of national heritage, art, culture
(vi) Benefits to armed forces veterans, war widows
(vii) Training to promote sports (rural, nationally recognized, Paralympic, Olympic)
(viii) Contribution to PM CARES Fund, PM National Relief Fund, specified government funds
(ix) Technology incubators in academic institutions (approved by Central Government)
(x) Rural development projects
(xi) Slum area development
(xii) Disaster management and relief
(xiii) Contribution to research institutions (ICAR, ICMR, CSIR, IITs, DAE, DBT, etc.)
Modes of CSR Implementation
CSR can be implemented through:
(a) Direct implementation: Company executes CSR projects itself through its own team.
(b) Through implementing agency: Section 8 company, registered trust, registered society with 3-year track record in similar activities. From 2021 amendment: the implementing agency must be registered with MCA on CSR-1 portal.
(c) Through approved funds: PM CARES, PM National Relief Fund, and other government-specified funds.
(d) Collaboration: Joint projects with other CSR-eligible companies.
CSR Reporting and Disclosure
Board Report: Annual Report on CSR must be annexed to the Board's Report in the prescribed format — disclosing: CSR policy, composition of CSR committee, average net profit, prescribed CSR expenditure, amount spent, amount unspent, details of projects, impact assessment (for companies with CSR obligation of Rs. 10 crore+ over 3 years).
CSR-1: Every entity (trust/society/Section 8 company) wanting to undertake CSR activities on behalf of eligible companies must register on MCA CSR portal and obtain CSR Registration Number.
CSR-2: Annual report on CSR filed as attachment with AOC-4.
Unspent CSR Amount — What Happens?
Ongoing projects: If CSR amount is unspent due to ongoing multi-year projects (up to 3 years): transfer unspent amount to a special bank account (Unspent CSR Account) within 30 days of FY close. Must be spent within 3 financial years — failing which, transfer to Schedule VII fund (PM CARES, etc.).
Non-ongoing projects: If CSR amount is unspent and NOT related to ongoing projects: transfer to Schedule VII fund within 6 months of FY close. There is NO option to carry forward — it must be deposited in a government fund.
Excess CSR — Set-Off
If the company spends MORE than the 2% obligation in a year: the excess can be set off against CSR obligation in the next 3 financial years (succeeding 3 FYs). This set-off is available only for amounts spent on or after January 22, 2021 (date of CSR Amendment Rules notification). The Board must pass a resolution approving the set-off.
Penalties for Non-Compliance
Section 135(7) (inserted by Companies Amendment Act, 2020): if a company fails to spend the required CSR amount AND fails to transfer unspent amount to the specified fund:
Company: penalty of twice the amount required to be transferred or Rs. 1 crore, whichever is less.
Every officer in default: penalty of one-tenth of the unspent amount or Rs. 2 lakh, whichever is less.
Additionally, the company must still transfer the unspent amount to the specified fund — the penalty does NOT substitute for the spending obligation.
Impact Assessment — For Large CSR Spenders
Companies with average CSR obligation of Rs. 10 crore or more in the preceding 3 financial years must undertake impact assessment of their CSR projects through an independent agency. The impact assessment report must be annexed to the Annual Report on CSR. This applies to the largest CSR spenders — approximately 200-300 companies in India. The impact assessment evaluates: whether the CSR project achieved its intended outcomes, the beneficiaries reached, sustainability of impact, and areas for improvement.