Corporate Social Responsibility Under Section 135: CSR Rules in India

Corporate social responsibility under Section 135 applies to companies that meet at least one financial threshold in the immediately preceding year. The law sets a minimum spending requirement, defines eligible work and requires companies to account for unspent amounts.

This guide explains the applicability tests, the 2% calculation, project rules, annual disclosures and consequences for a shortfall. It follows Section 135 of the Companies Act, 2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2014, as amended.

What Is Corporate Social Responsibility Under Section 135?

Corporate social responsibility (CSR) is the statutory obligation for specified companies to plan, fund and report eligible social-development activities. Section 135 of the Companies Act, 2013 and Schedule VII set the core framework; the Ministry of Corporate Affairs publishes the Act, rules and filing instructions on its official portal.

CSR is not simply a donation or a public-relations campaign. A company needs an approved policy, eligible activity, documented spending and the required disclosures. The Board remains responsible for compliance even when a project is delivered by an outside agency.

Who Must Comply With CSR Under Section 135?

A company is covered if it meets any one of the three tests in the immediately preceding financial year: net worth of at least Rs 500 crore, turnover of at least Rs 1,000 crore, or net profit of at least Rs 5 crore. Crossing one threshold is enough.

The tests apply to companies, not only large listed groups. A private company or a Section 8 company can also fall within Section 135 when it meets a threshold. Check the company’s legal status and the immediately preceding year’s figures before concluding that CSR does not apply.

How Is the 2% CSR Spending Requirement Calculated?

The company must spend at least 2% of its average net profits for the three immediately preceding financial years, with net profit calculated under Section 198 of the Companies Act. Do not substitute profit after tax without checking the statutory adjustments.

The example shows the arithmetic only. A company’s actual base comes from the Section 198 computation, including the adjustments required by that provision. If it has not completed three financial years since incorporation, use the immediately preceding financial years available since incorporation.

The Percentage Calculator can verify the 2% arithmetic after the correct statutory profit figure is established; it does not calculate net profit under Section 198.

A company may spend more than the required amount. Treatment of excess spending against a later year is subject to the CSR Rules and prescribed Board resolutions, so record the decision and verify the applicable conditions before carrying it forward.

Which Activities Qualify as CSR Under Schedule VII?

CSR spending must support activities covered by Schedule VII, read with the CSR Rules and relevant MCA clarifications. Common areas include health and sanitation, education and skills, gender equality, environmental sustainability, protection of national heritage, rural development and disaster relief.

• Eradicating hunger, poverty and malnutrition, and supporting preventive healthcare and sanitation.
• Promoting education, vocational skills, employment-enhancing skills and support for children and people with disabilities.
• Advancing gender equality, women’s empowerment, care for senior citizens and support for disadvantaged groups.
• Protecting the environment, conserving natural resources and supporting ecological sustainability.
• Preserving national heritage, art and culture, and promoting recognised rural and national sports.
• Contributing to eligible relief funds, disaster management, rural development and slum-area development.
• Supporting eligible research, incubators and institutions in the fields and forms specified in Schedule VII.

This is a practical summary, not a substitute for the statutory list. Match the project’s actual purpose and expenditure to Schedule VII and the current CSR Rules before approving it.

Which Activities Do Not Qualify as CSR?

The CSR Rules exclude several kinds of expenditure, even when the activity has a social benefit. The company should screen each proposal against the exclusions before counting its cost toward the annual obligation.

• Activities undertaken in the normal course of the company’s business, subject to limited exceptions in the rules.
• Activities outside India, except the permitted training of Indian sports personnel representing a state, union territory or India.
• Contributions, directly or indirectly, to a political party under Section 182 of the Companies Act.
• Activities that benefit the company’s employees and their families exclusively.
• Sponsorship activities intended to obtain marketing benefits for products or services.
• Activities undertaken to fulfil another statutory obligation.

The exclusions are set out in the CSR Rules. Where a project has both eligible and ineligible components, keep the cost allocation and supporting records clear rather than counting the full project spend by default.

Who Can Implement a Company’s CSR Project?

A company may implement a CSR project itself or through an eligible implementing agency that meets the CSR Rules. A qualifying agency must register with the Ministry of Corporate Affairs by filing Form CSR-1 before undertaking CSR activities on a company’s behalf, unless an exemption applies.

Before appointing an agency, verify its legal form, registrations, experience and CSR-1 status. The company should also document the scope, milestones, use of funds and monitoring arrangements in its approval and project records.

When budgeting vendor invoices for an approved project, the GST Calculator can estimate the tax component. Check the applicable input-tax-credit and CSR-spend treatment separately before recording the cost.

What Must the CSR Committee and Board Do?

The Board and, where required, the CSR Committee oversee the CSR policy, annual spending plan, projects and disclosures. The Committee recommends a policy and spend, while the Board approves the policy and ensures that the company acts on it.

A company whose amount required to be spent under Section 135(5) does not exceed Rs 50 lakh is not required to constitute a CSR Committee; the Board performs the prescribed functions. For other companies, committee composition depends on the company’s status and the Act’s requirements.

The Board should review project progress and utilisation, satisfy itself that disbursed funds were used for approved purposes, and explain any shortfall in the Board’s report. Responsibility cannot be shifted to the implementing agency.

What Happens to Unspent CSR Amounts?

The transfer deadline depends on whether the unspent amount relates to an ongoing project. Section 135 distinguishes ongoing-project money from other unspent CSR amounts, and the company must document each transfer.

An ongoing project must satisfy the definition and conditions in the CSR Rules; labelling an activity “ongoing” is not enough. Keep the project approval, commencement evidence, budget, milestones and transfer proof with the annual CSR records.

What CSR Reporting and Forms Must a Company Complete?

A company must disclose its CSR policy, committee, approved projects, spending, shortfall and unspent transfers in the prescribed Board’s report and comply with the applicable MCA filings. Form CSR-2 is the annual CSR reporting form; check the Ministry of Corporate Affairs website for the current filing method and due date.

Keep a file for each financial year with the Section 198 profit computation, threshold assessment, Board and Committee approvals, project agreements, invoices, utilisation evidence, impact assessment where required, and proof of transfers. Form CSR-1 is the implementing agency’s registration, not a replacement for the company’s own reporting.

What Is the Penalty for CSR Non-Compliance?

Section 135(7) sets penalties for specified failures to transfer unspent CSR amounts to the required account or fund. The company may face twice the amount required to be transferred or Rs 1 crore, whichever is less; an officer in default may face one-tenth of that amount or Rs 2 lakh, whichever is less.

The penalty provision is not a substitute for completing the transfer. Companies should reconcile the obligation, actual spending and transfers before approving the annual Board’s report and filing.

How to Prepare for Annual CSR Compliance

A company can prepare its annual CSR compliance by checking eligibility first, calculating the statutory obligation, then recording approvals, project delivery, spending and transfers.

The statutory source is Section 135, Schedule VII and the Companies (CSR Policy) Rules, 2014, as amended. Refer to the India Code legislation portal and MCA for the current text and notifications. This guide is general information, not legal or accounting advice.

Frequently Asked Questions About CSR