Corporate Social Responsibility spending in India is governed by Section 135 of the Companies Act, 2013 and the CSR Rules, 2014 as amended. A qualifying company must spend at least two per cent of its average net profits from the three preceding financial years on activities listed in Schedule VII, must run this through a CSR committee of the board, must appoint a CSR-1 registered implementing agency where applicable, and must file an annual CSR-2 report with the Ministry of Corporate Affairs. Non-compliance carries monetary penalties.
This guide is written for Company Secretaries, CFOs, and CSR heads who need a single reference for what is required, in what order, and what changed most recently. It covers applicability, computation, Schedule VII, implementation, reporting, and impact assessment.
Which companies must comply
A company falls under Section 135 if, in the immediately preceding financial year, it meets any one of these three thresholds:
- Net worth of five hundred crore rupees or more, or
- Turnover of one thousand crore rupees or more, or
- Net profit of five crore rupees or more.
Once a company meets any of these thresholds, it must constitute a CSR committee, adopt a CSR policy, and spend at least two per cent of its average net profits from the three immediately preceding financial years on Schedule VII activities. A company that ceases to meet the thresholds for three consecutive financial years is no longer required to comply until it meets them again.
How the two per cent is calculated
The two per cent is calculated on the average net profit of the three immediately preceding financial years, computed under Section 198 of the Companies Act. Net profit under Section 198 is different from profit before tax; it excludes certain items and adds back others. The company's auditor or Company Secretary computes the CSR obligation each year based on the audited accounts.
Any unspent portion at year end has to be handled per Section 135(5) and 135(6):
- For ongoing projects, unspent amounts must be transferred within thirty days of the financial year end to a designated Unspent CSR Account and spent within three financial years.
- For amounts unspent that are not attributable to an ongoing project, the unspent portion must be transferred within six months of the financial year end to a Schedule VII fund such as the Prime Minister's National Relief Fund.
Schedule VII: what your CSR spending can fund
Schedule VII lists eleven activity clauses. Most CSR spending in India lands under these:
| Clause | Activity |
|---|---|
| (i) | Eradicating hunger and poverty; healthcare, sanitation, and safe drinking water |
| (ii) | Promoting education, including special education and vocational skills |
| (iii) | Gender equality, women's empowerment, old age homes, and support for the differently abled |
| (iv) | Environmental sustainability, conservation of natural resources, quality of soil, air, and water |
| (v) | Protection of national heritage, art, and culture |
| (vi) | Measures for the benefit of armed forces veterans, war widows, and their dependents |
| (vii) | Training to promote rural sports, Paralympic and Olympic sports |
| (viii) | Contribution to specified government funds including the PM's National Relief Fund and PM CARES |
| (ix) | Contribution to incubators funded by the Central Government and to research in science and technology |
| (x) | Rural development projects |
| (xi) | Slum area development |
A project that could arguably fit multiple clauses should be attributed to the single clause it best fits, with clear internal documentation. Split attribution is technically possible but tends to attract auditor attention.
How CSR spending is actually implemented
A company can execute its CSR spending in one of three ways:
- Directly by the company, treating the spending as its own project. This is unusual for anything below a certain scale.
- Through an implementing agency. This is the most common route. The implementing agency must be one of: a Section 8 company, a registered public trust, or a registered society; and it must hold valid 12A and 80G registrations and be CSR-1 registered with the Ministry of Corporate Affairs.
- Through a section 135 fund listed in Schedule VII (vii) or (viii). For example, contributing to the PM's National Relief Fund.
For most companies, route two is the main choice. Read our companion guide on CSR-1 registration for a walk-through of the implementing agency route.
CSR committee requirements
A CSR committee of the board is required for any company falling under Section 135. The committee must have at least three directors, with at least one independent director. For companies not required to have independent directors, two directors are sufficient. The committee is responsible for:
- Formulating and recommending the CSR policy
- Recommending the amount of CSR spending each year
- Monitoring the implementation of the CSR policy
- Approving the impact assessment report where applicable
CSR-2 annual reporting to the MCA
Form CSR-2 is the annual CSR report every applicable company must file with the Ministry of Corporate Affairs. It carries details of the CSR committee, the CSR policy, the spending, the ongoing projects, the unspent amount, the implementing agencies, and the impact assessment status where applicable. The MCA has issued updated formats over the years; check the latest CSR-2 form on mca.gov.in before filing.
Impact assessment threshold
Companies with an average CSR obligation of ten crore rupees or more in the three immediately preceding financial years must conduct an impact assessment through an independent agency for CSR projects with outlays of one crore rupees or more and completed in the previous financial year. The impact assessment report is placed before the board and disclosed in the annual report on CSR.
For companies below the ten crore threshold, impact assessment is not mandatory but is often taken up voluntarily for material projects, both for internal learning and for board reporting quality.
Penalties for non-compliance
Under Section 135(7), a company that fails to transfer unspent CSR amounts to the required fund or Unspent CSR Account is liable for a penalty of twice the unspent amount required to be transferred or one crore rupees, whichever is less. Every officer of the company in default is liable to a penalty of one-tenth of the unspent amount required to be transferred or two lakh rupees, whichever is less. Non-filing of CSR-2 or other related non-compliance carries its own penalties under the general provisions.
A short compliance checklist for your CSR cycle
- Confirm applicability against the three Section 135 thresholds
- Compute the two per cent obligation on average net profits under Section 198
- Constitute or refresh the CSR committee
- Adopt or update the CSR policy in line with Schedule VII
- Identify projects and select implementing agencies with CSR-1 registration
- Sign scoped project MoUs and disburse in tranches with utilisation reporting
- Transfer unspent amounts within thirty days or six months as applicable
- Commission impact assessments for projects above the threshold
- File CSR-2 with the MCA
- Disclose in the annual report on CSR in the Board's Report
Where Nikhaar Foundation fits as an implementing agency
Nikhaar Foundation is CSR-1 registered under CSR00107287 with the Ministry of Corporate Affairs, and 12A and 80G registered under the Income Tax Act, 1961. Our programmes map to Schedule VII (i) safe drinking water, (ii) education, and (iv) environmental sustainability. If you would like a costed project proposal aligned to one of these Schedule VII clauses, plus the full documentation pack for your CSR committee, start on our CSR partnerships page. If you would rather see what a delivered project looks like first, our impact page covers the community water pump case study.
Frequently asked
Answers to the questions this article gets asked.
Which companies are required to comply with CSR rules in India?
Any Indian company that meets any one of three thresholds in the immediately preceding financial year is required to comply: net worth of five hundred crore rupees or more, turnover of one thousand crore rupees or more, or net profit of five crore rupees or more. The obligation continues until the company fails to meet all three thresholds for three consecutive financial years.
How is CSR spending calculated?
The CSR obligation is two per cent of the average net profits of the three immediately preceding financial years, calculated under Section 198 of the Companies Act, 2013. Net profit under Section 198 is a specific formulation and is different from profit before tax; the company's auditor computes it against the audited accounts.
What activities count as CSR under Schedule VII?
Schedule VII of the Companies Act, 2013 lists eleven activity clauses covering areas including hunger and poverty eradication, education, gender equality, environmental sustainability, heritage conservation, armed forces welfare, sports, government funds, incubators, rural development, and slum area development.
Can a company implement CSR directly or must it use an NGO?
A company can implement CSR directly, through an implementing agency, or through Schedule VII specified funds. If it uses an implementing agency, that agency must be a registered public trust, society, or Section 8 company holding 12A and 80G under the Income Tax Act and CSR-1 registration with the Ministry of Corporate Affairs.
What is Form CSR-2?
Form CSR-2 is the annual CSR reporting form that every company subject to Section 135 must file with the Ministry of Corporate Affairs. It captures CSR committee composition, CSR policy details, spending, ongoing projects, unspent amounts, implementing agencies used, and impact assessment status where applicable.
When is a CSR impact assessment mandatory?
A CSR impact assessment through an independent agency is mandatory for companies with an average CSR obligation of ten crore rupees or more in the three preceding financial years, and only for individual projects with outlays of one crore rupees or more that were completed in the previous financial year. Below these thresholds, impact assessment is voluntary.
What happens to unspent CSR funds?
Unspent CSR funds attributable to an ongoing project must be transferred within thirty days of the financial year end to a designated Unspent CSR Account and spent within three financial years. Unspent funds not attributable to an ongoing project must be transferred within six months of the financial year end to a Schedule VII specified fund such as the PM's National Relief Fund.
What is the penalty for CSR non-compliance?
Under Section 135(7), a company that fails to transfer unspent CSR amounts as required is liable for a penalty of twice the unspent amount or one crore rupees, whichever is less. Each officer in default is liable for one-tenth of the unspent amount or two lakh rupees, whichever is less. Additional penalties apply for failure to file CSR-2 and other related non-compliance.
Can CSR funds be spent outside India?
As a general rule, CSR spending must benefit local areas and preferably the local area around which the company operates. CSR activities outside India are permitted only in a very narrow set of circumstances, such as training of Indian sportspersons representing any state or union territory at national level, or representing the country at international level.
Is CSR spending tax deductible for the company?
CSR spending is not generally allowed as a business expense under Section 37(1) of the Income Tax Act. However, contributions to certain Schedule VII entities may be eligible for a deduction under Section 80G subject to conditions. The specific tax treatment should be confirmed with the company's tax advisor for each transaction.