Corporate Social Responsibility (CSR) in India sits at an unusual intersection of law, finance, governance, and impact. Under Section 135 of the Companies Act, 2013, CSR is no longer “good to have” — for certain companies, it is a legal obligation with defined thresholds, timelines, and penalties.

If you are in a CSR, finance, legal or compliance role, your first job is to answer four questions clearly:

1. Is my company covered under Section 135 (CSR applicability)?

2. How much are we required to spend?

3. How do we comply correctly (committee, policy, projects, partners)?

4. What happens if we under-spend, mis-spend, or don’t report?

This guide is built to answer exactly these questions, in detail.

1. CSR Applicability – When Does Section 135 Apply?

Section 135(1) says that CSR provisions apply to every company (including holding, subsidiary, foreign and Section 8 companies) that, in the immediately preceding financial year, meets any one of these thresholds: CAIRR ClearTax

Net worth of ₹500 crore or more, OR

Turnover of ₹1,000 crore or more, OR

Net profit of ₹5 crore or more

A few important points for a CSR manager:

• You only look at the immediately preceding financial year, not a rolling average. Mehta & Mehta CSR Advisory

• If any one criterion is met, CSR becomes applicable for the next year — even if the others are below threshold.

• All “companies” registered under the Act are covered: including private companies, listed/unlisted, Section 8 companies, and foreign companies with a branch/project office in India. ClearTax

Quick working example

Company A (FY 2024–25):

• Net worth: ₹600 crore

• Turnover: ₹900 crore

• Net profit: ₹3 crore

Even though net profit is < ₹5 crore, CSR applies because net worth ≥ ₹500 crore.

2. How to Compute CSR Obligation – The 2% Rule and “Net Profit”

Once applicability is triggered, the Board must ensure that the company spends at least 2% of the average net profits of the previous three financial years on CSR activities. CAIRR

2.1 What is “net profit” for CSR?

This is a common confusion area.

For CSR, “net profit” is not your income-tax profit. It is calculated as per Section 198 of the Companies Act: C S Kelkar and Associates ICSI

- It is primarily net profit before tax.

- You exclude:

• Profits from overseas branches

• Dividends from other Indian companies (on which you’re not paying tax)

- You include other operating income as per Section 198 rules.

If your company has not completed three full financial years, you take the average of the years available (e.g., 2 years or 1 year).

2.2 Simple illustration

Assume your CSR applicability is triggered for FY 2025–26.

Your net profits (as per Section 198) are:

• FY 2022–23: ₹8 crore

• FY 2023–24: ₹10 crore

• FY 2024–25: ₹12 crore

Average net profit = (8 + 10 + 12) / 3 = ₹10 crore CSR obligation = 2% of 10 crore = ₹20 lakh

That ₹20 lakh is the minimum amount to be spent on eligible CSR activities during FY 2025–26.

3. CSR Committee – When You Need It and How to Structure It

Once CSR is applicable, you also need to think about governance.

3.1 When is a CSR Committee mandatory?

CSR Rules say: dpncindia.com

• If your CSR obligation is ₹50 lakh or more, you must constitute a CSR Committee of the Board.

• If the CSR obligation is less than ₹50 lakh, the Board itself can perform the functions of the CSR Committee (no separate committee is needed).

3.2 Composition

For a standard company: dpncindia.com

• At least 3 directors

• At least 1 independent director

For private / unlisted companies where no independent director is required under the Act:

• 2 directors are sufficient.

For foreign companies:

- At least 2 persons:

-One resident in India

• One nominated by the foreign company

3.3 What does the CSR Committee actually do?

In practice, the CSR Committee is responsible for:

• Recommending the CSR policy and annual action plan

• Proposing projects and budgets

• Recommending the mode of implementation (in-house vs NGO partner)

• Monitoring progress and utilisation

• Reviewing impact assessment findings, where applicable coal.gov.in

As a CSR head, this is the group you report to and work with to get Board-level approval.

4. CSR Policy and Strategy – Translating Law into Action

Every CSR-eligible company has to formulate a CSR Policy, which essentially answers:

• Where will we spend? (thematic areas)

• How will we spend? (approach & partners)

• How much will we spend? (budget linked to 2% rule)

• How will we monitor and report?

The policy must align with the list of permissible activities in Schedule VII of the Act (education, environment, health, etc.). It should also respect the statutory preference for local areas where the company operates, as mentioned in the proviso to Section 135(5). Vinod Kothari Consultants

In practice, many companies now:

• Choose 2–3 focus themes (e.g., education + environment + health).

• Define geographies (e.g., around plants, supply chains, priority states).

• Use multi-year programs rather than scattered donations.

5. What Counts as CSR? (Schedule VII Activities – With Practical Lens)

CSR spending must be on activities listed in Schedule VII (read with MCA circulars). Broadly, eligible activities cover: ClearTax

• Eradicating hunger, poverty, malnutrition; promoting health care, sanitation

• Education, skill development, livelihood enhancement

• Gender equality and women empowerment

• Environmental sustainability, afforestation, biodiversity, water conservation, climate action

• Protection of national heritage, art, culture

• Support to armed forces veterans

• Rural development, slum area development

• Disaster management (relief, rehabilitation)

• Research & development, technology incubation for social benefit

Some grey areas clarified by practice and FAQs

The FAQs from MCA and professional bodies make a few things clear: coal.gov.in ICSI

• CSR cannot be spent on activities done exclusively for employees and their families.

• It must be over and above normal business obligations.

• Activities that are purely marketing or brand-building in disguise do not qualify.

• Contribution in kind is not accepted as CSR spend — it must be monetary and traceable. dpncindia.com

As a CSR lead, always ask: “Is this primarily for community benefit, or primarily for our business?” If it’s the latter, it’s likely not CSR-eligible.

6. What Does Not Qualify as CSR (and Why It Matters)

The CSR Policy Rules specifically define what is not CSR: C S Kelkar and Associates

• Activities in the normal course of business (with some limited Covid-related exceptions in the past).

• Contributions to political parties (already governed by a separate regime).

• Activities that significantly benefit employees directly.

• One-off events, sponsorships, marathons, awards, etc., done mainly for brand promotion.

• Projects outside India, except for certain international sports events.

This matters because during CSR audits and MCA scrutiny, misclassification can lead to:

• CSR shortfall (because spend is disallowed)

• Penalties for non-compliance

• Reputational risk

So, documentation and legal vetting of each project’s CSR eligibility is important.

7. How to Implement CSR – Direct vs Through NGOs (CSR-1)

You can implement CSR in two broad ways:

1. Directly, through your own teams and structures, or

2. Indirectly, through implementing agencies (usually NGOs).

7.1 Who can be an implementing agency?

Post-2021, only certain entities can act as CSR implementing agencies and they must be registered with the Central Government through Form CSR-1: Give+4ClearTax+4csr.icai.org+4

• Section 8 companies

• Registered public trusts

• Registered societies

They must usually have:

12A & 80G registration (for tax exemption/benefit)

• Minimum 3-year track record in relevant activities

• Proper financial statements and governance

On successful filing of CSR-1, the NGO gets a CSR Registration Number, which:

• Acts as its official CSR identity

• Must be quoted by companies in CSR reporting

• Helps MCA track fund flows and utilisation ThinkCap Advisors

As a CSR manager, you should:

• Only onboard CSR-1 registered partners

• Conduct basic due diligence (governance, FCRA if foreign funds, program capacity)

• Link disbursements clearly to approved projects and outcomes.

8. Unspent CSR Amount – Ongoing vs Other Than Ongoing Projects

One of the most technical parts of Section 135 today is how you handle unspent CSR. The 2021 amendments turned the old “comply or explain” model into a “comply or transfer” model. coal.gov.in hclfoundation.org

8.1 If the project is an “ongoing project”

• You open a separate “Unspent CSR Account” in a scheduled bank.

• Any amount relating to an ongoing project that remains unspent at year end must be transferred to this account within 30 days from the end of the financial year.

• You then have 3 financial years to spend this amount on that ongoing project.

• If still unspent after 3 years, it must be transferred to a Schedule VII fund (e.g., PMNRF, PM CARES, etc.).

8.2 If the amount is not tied to an ongoing project

Any unspent amount not committed to an ongoing project must be transferred directly to a Schedule VII fund within 6 months of the end of the financial year.

This forces companies to:

• Plan CSR early in the year

• Avoid last-minute spending

• Treat CSR like a regular business process, not an afterthought.

9. Impact Assessment – When You Must Do It and How It Works

Impact assessment is a relatively new layer introduced to ensure quality and effectiveness, not just quantum of spend.

You must conduct an external impact assessment if: coal.gov.in goodera.com

• Your company has average CSR obligation of ₹10 crore or more in the three immediately preceding financial years, AND

• The individual CSR project under review has an outlay of ₹1 crore or more.

Key points:

• It must be done by an independent agency, not internally. coal.gov.in+1

• The report is placed before the Board and annexed to the annual CSR report. coal.gov.in+2ClearTax+2

You can book the cost of impact assessment as CSR expenditure, but capped at 5% of total CSR spend or ₹50 lakh, whichever is lower. ClearTax+2BC Shetty & Co.+2

For a CSR manager, this means: Design projects with clear baselines, indicators and M&E plans.

Engage impact assessment partners early (not after project completion).

Use the findings to shape next year’s CSR strategy.

10. Reporting and Disclosures – CSR-2, Board’s Report, Website Compliance isn’t complete without proper reporting. 10.1 CSR-2 Filing Under the Companies (Accounts) Amendment Rules, 2022, every company covered under Section 135 must file Form CSR-2 annually with the Registrar of Companies, starting from FY 2020–21. hclfoundation.org CSR-2 captures: Applicability

2% computation

Amount spent, unspent, transferred

Project details

Implementing agency details

10.2 Board’s Report Rule 8 of the CSR Policy Rules requires that the Board’s Report includes a detailed CSR Annexure with: coal.gov.in+2ICSI+2 Composition of CSR Committee

CSR policy and web link

Amount required to be spent and actually spent

Details of ongoing and completed projects

Reasons for any shortfall

Impact assessment summary (if applicable)

10.3 Website Disclosures Companies must also disclose on their website: coal.gov.in+1 CSR Committee composition

CSR Policy

Approved CSR projects

For a CSR manager, this is your chance to make transparency a strength, not a chore.

11. Penalties and Personal Liability Failure to transfer unspent CSR funds or non-compliance with Section 135 can trigger penalties: KPMG Assets+1 Company: Penalty ranging from ₹50,000 up to ₹25 lakh.

Officers in default: Penalty from ₹50,000 up to ₹5 lakh.

The regime has been softened from “criminal” to “civil” in 2021, but personal liability remains real for directors and key managers. From a risk perspective, proper planning, documentation and Board engagement are non-negotiable.

12. Common Practical Pitfalls (What CSR Managers Often Get Wrong) From various FAQs, circulars and practice, a few patterns emerge: Checking applicability wrongly – using 3-year averages instead of “immediately preceding year” for thresholds. Mehta & Mehta CSR Advisory

Using tax profit instead of Section 198 profit to calculate 2%. csr.odisha.gov.in+1

Treating brand campaigns or customer promotions as CSR.

Not registering implementing agencies with CSR-1, leading to disallowance later. ClearTax+1

Pushing all project finalisation to Q4, leading to rushed and low-quality CSR.

Forgetting to transfer unspent CSR to the designated account/fund within timelines. KPMG Assets+1

If you avoid these six, you are already ahead of many companies.

13. Big Picture: Using CSR as Strategy, Not Just Compliance Section 135 is often seen as a compliance headache. But for a thoughtful CSR or ESG lead, it is also a strategic lever: You have ring-fenced capital (2% of profits) every year to build long-term impact.

You can align CSR themes with your company’s sustainability priorities (e.g., water stewardship if you’re water-intensive, afforestation if you’re in infra).

With proper impact assessment, you can demonstrate measurable outcomes to the Board, regulators, and the public.

In that sense, understanding CSR applicability and the ecosystem around it is not just about avoiding penalties — it’s about using a legally mandated budget to build real, credible, long-term impact.

If you’d like, next I can: Turn this into a CSR handbook PDF you can share internally.

Create a one-page decision tree: “Is CSR applicable to my company?”

Draft a CSR Policy template aligned with Section 135 and Schedule VII.

FAQs on CSR Applicability & the CSR Ecosystem (India, Section 135)

1. What is CSR under Section 135 of the Companies Act? CSR (Corporate Social Responsibility) under Section 135 is a mandatory legal requirement for eligible companies to spend 2% of their average net profits on approved social, environmental, and developmental activities. It is not charity; it is a compliance-driven obligation intended to integrate businesses into national development goals.

2. Which companies are required to do CSR? CSR becomes applicable to any company in India — private, public, listed, unlisted, Section 8, holding/subsidiary, or foreign company with an Indian presence — if it meets any one of the following thresholds in the immediately preceding financial year: Net worth ≥ ₹500 crore, OR

Turnover ≥ ₹1,000 crore, OR

Net profit ≥ ₹5 crore

Even meeting one criterion is enough to trigger CSR.

3. Once CSR becomes applicable, does it remain applicable permanently? No. CSR applicability is assessed every financial year based on the immediately preceding year’s financials. However, if CSR becomes applicable once, the company must: Constitute or retain its CSR Committee (if applicable),

Spend CSR for that year,

Report CSR details appropriately.

CSR may cease to apply in subsequent years if none of the financial criteria are met. But compliance for the year of applicability remains mandatory.

4. How is the mandatory CSR spending calculated? Companies must spend at least 2% of the average net profits of the last three financial years, computed as per Section 198 of the Companies Act (not as per Income Tax Act). Key points: "Net profit" means profit before tax.

Excludes profits from overseas branches.

Excludes dividends received from other Indian companies.

5. What exactly is “Section 198 net profit”? Section 198 specifies how net profit is to be computed for CSR. It: Removes certain incomes (foreign branch profit, dividend income, unrealised gains)

Adds back certain expenses (e.g., depreciation adjustments)

Uses profit before tax

This ensures CSR is based on operational profitability, not tax optimization.

6. What happens if a company spends less than its required CSR amount? Under the amended rules: Unspent amount for Ongoing Projects → must be transferred to an Unspent CSR Account within 30 days of FY end and used within 3 years.

Unspent amount for Other Projects → must be transferred to a Schedule VII Fund within 6 months of FY end.

Non-transfer results in penalties for the company and officers.

7. Which activities qualify as CSR under Schedule VII? CSR money can be used for: Education, literacy, scholarships

Healthcare, nutrition, sanitation

Environment, afforestation, biodiversity, water conservation

Gender equality, women empowerment

Rural development

Disaster management (relief & rehabilitation)

Support to PM funds

Sports

Research & development

Technology incubation for social benefit

CSR activities must be for the public good, not for employees or business promotion.

8. What does NOT qualify as CSR? CSR cannot be: Part of normal business operations (except certain COVID exceptions in the past)

Activities benefiting only employees

Political donations

One-time events, marathons, sponsorships purely for brand promotion

Activities outside India (except sports)

Direct marketing/advertising disguised as CSR

Capital expenditure intended only for business benefit

CSR must deliver community benefit, not business gain.

9. What is a CSR Committee and who needs to form it? A CSR Committee is a board-level committee responsible for CSR planning and oversight. Required when CSR spend ≥ ₹50 lakh Composition: Minimum 3 directors

At least 1 independent director

CSR Committee NOT required if CSR spend < ₹50 lakh In such cases, the Board itself assumes the responsibilities of the CSR Committee.

10. What are the duties of the CSR Committee? The committee must: Draft and recommend the CSR Policy

Recommend CSR budget

Approve CSR project list

Oversee implementation and utilisation

Review impact assessment reports

Report regularly to the Board

For a CSR Manager, this is your primary governing body for project approvals.

11. Can companies implement CSR directly? Yes. CSR may be implemented: Directly by the company

Through CSR-1 registered NGOs or implementing agencies

Through government-approved Schedule VII funds

Direct implementation is allowed but requires strong internal capacity.

12. What types of NGOs are allowed to implement CSR projects? Only the following can implement CSR on behalf of companies: Section 8 companies

Registered public trusts

Registered societies

These must also: Be registered under CSR-1

Have 12A & 80G (for tax)

Possess at least 3 years’ track record in relevant fields

Without CSR-1 registration, CSR spending through them is disallowed.

13. Are overhead or administrative expenses allowed as part of CSR? Yes, but capped: Maximum 5% of total CSR expenditure

Must relate strictly to CSR administration (not general corporate overhead)

14. What is an “Ongoing Project” in CSR? An Ongoing Project is: A multi-year project

Extended up to three financial years (excluding the year of commencement)

Approved by the Board

Monitored through milestones and progress reports

These projects are eligible for the Unspent CSR Account mechanism.

15. What is “impact assessment” and who must do it? Impact assessment is an independent study to evaluate if CSR projects have delivered the planned social or environmental outcomes. Mandatory for companies that: Have CSR obligation of ₹10 crore or more in the past 3 years

Have executed CSR projects worth ₹1 crore or more

The assessment report must be placed before the Board and included in the annual CSR report.

16. Can a company carry forward excess CSR spending? Yes. Surplus CSR spending can be set off for up to 3 financial years, provided the conditions in CSR Rules are met and the Board resolution is passed. However, surplus generated from CSR activities cannot be taken as profit; it must be used again for CSR.

17. Is CSR spending allowed outside India? No — except for: Training of Indian sportspersons in international sports events.

Everything else must be within India.

18. What reporting is mandatory for CSR compliance? CSR compliance involves three layers of reporting: CSR-2 Filing (mandatory annual e-form with MCA)

Board’s Report (Annual Report)

CSR Policy

Committee composition

Amount spent & unspent

Project details

Impact assessment

Website Disclosure

CSR policy

Committee

Ongoing & approved projects

These disclosures must be accurate and up to date.

19. What are the penalties for CSR non-compliance? If the company fails to transfer unspent CSR funds: Company: Penalty of ₹50,000 to ₹25 lakh

Officers in default: Penalty of ₹50,000 to ₹5 lakh

Penalties are civil, not criminal — but they apply strictly.

20. Can CSR be used to build brand image or marketing? No. CSR cannot be used for marketing campaigns, product promotions, or activities that primarily benefit the company. CSR must prioritize community impact, not business objectives.

21. Can employee volunteering hours be counted as CSR? No. Volunteer hours, employee salaries, or internal manpower costs cannot be counted as CSR expenditure. However, employees may volunteer as long as the project itself is CSR-eligible.

22. Does CSR apply to LLPs? No. LLPs are not “companies” under the Companies Act and therefore CSR does not apply to LLPs, unless they separately incorporate a company.

23. Can CSR be used for donation of products manufactured by the company? No. CSR cannot include: Donation of company’s own products

Discounts or promotions

In-kind contributions

CSR must be purely monetary and traceable.

24. Can CSR be done through government departments? CSR may be contributed to Schedule VII funds (like PMNRF, PM CARES Fund, Swachh Bharat Kosh), but not directly to all government departments. However, CSR projects can be executed in partnership with government agencies as implementing partners.

25. Can foreign companies with Indian branches be required to do CSR? Yes. Any foreign company with: A branch office

Project office

Business presence in India

must comply with CSR if it meets Section 135 thresholds. They must create a CSR Committee with at least one resident Indian and file the required CSR reports.