Quick Answer
India became one of the first countries in the world to mandate corporate social responsibility through legislation. The Companies Act, 2013 introduced Section 135, which came into effect on 1 April 2014. The provision was further strengthened by the Companies (CSR Policy) Amendment Rules, 2021, which brought in significant changes including.
India became one of the first countries in the world to mandate corporate social responsibility through legislation. The Companies Act, 2013 introduced Section 135, which came into effect on 1 April 2014. The provision was further strengthened by the Companies (CSR Policy) Amendment Rules, 2021, which brought in significant changes including mandatory registration of implementing agencies, impact assessment requirements, and stricter transfer provisions for unspent CSR amounts.
The key statutory provisions governing CSR include:
Companies must also be mindful of the interplay between CSR obligations and provisions relating to company secretarial compliance, as the CSR Committee’s constitution, meetings, and reporting intersect with broader board governance requirements.
Section 135(1) prescribes three alternative thresholds. A company triggers CSR obligations if, during the immediately preceding financial year, it meets any one of the following criteria:
| Criterion | Threshold |
|---|---|
| Net Worth | ₹500 crore or more |
| Turnover | ₹1,000 crore or more |
| Net Profit | ₹5 crore or more |
It is important to note that these thresholds are tested on the basis of the immediately preceding financial year only. If a company ceases to meet the thresholds for three consecutive financial years, it is no longer required to comply with CSR provisions from the financial year in which it ceases to qualify. However, any obligation relating to unspent CSR amounts from previous years must still be fulfilled.
The net profit for CSR is computed under Section 198 of the Companies Act, 2013, which differs from the accounting profit or the profit computed under the Income Tax Act, 1961. Key adjustments include:
The 2% spending obligation is calculated on the average net profits of the three immediately preceding financial years. For companies that have not completed three financial years since incorporation, the average is computed over the years since incorporation.
Every company meeting the applicability thresholds must constitute a CSR Committee of the Board. The composition requirements are as follows:
The 2021 Amendment Rules provide that where the CSR obligation of a company does not exceed ₹50 lakh, the requirement to constitute a CSR Committee is dispensed with. In such cases, the functions of the CSR Committee shall be discharged by the Board of Directors directly.
The CSR Committee is responsible for:
Proper documentation of CSR Committee meetings is essential and falls within the purview of secretarial compliance services that ensure minutes, resolutions, and records are maintained in accordance with Secretarial Standards.
CSR expenditure must be directed towards activities falling within the ambit of Schedule VII of the Companies Act, 2013. The Schedule provides a broad framework, and companies have flexibility in choosing specific projects within these categories:
The following activities are expressly excluded from qualifying as CSR expenditure:
A landmark change introduced by the 2021 Amendment Rules is the requirement for mandatory registration of entities undertaking CSR activities on behalf of companies. Every entity (other than the company itself) that intends to undertake CSR activities must file Form CSR-1 electronically with the Ministry of Corporate Affairs and obtain a unique CSR Registration Number.
The entity must have an established track record of at least three years in undertaking similar activities, unless it has been set up by the company itself or its holding, subsidiary, or associate company.
The entity must file Form CSR-1 on the MCA portal, providing details of its registration, activities, geographic areas of operation, and governing body. Upon verification, the MCA issues a unique CSR Registration Number, which must be quoted by the company in its CSR-2 annual report.
The Board of Directors, after considering the recommendations of the CSR Committee, must ensure that the company spends at least 2% of the average net profits of the three immediately preceding financial years on CSR activities approved in the annual action plan.
If a company spends more than the prescribed 2% in a financial year, the excess amount may be set off against the CSR obligation in the immediately succeeding three financial years, subject to conditions prescribed under Rule 7(3). The Board must pass a resolution approving the set-off, and the details must be disclosed in the Board’s Report.
Administrative overheads incurred in planning, implementation, monitoring, and evaluation of CSR projects shall not exceed 5% of the total CSR expenditure of the company for that financial year. This cap ensures that the majority of CSR funds reach the intended beneficiaries.
Any capital asset created or acquired through CSR spending shall be held by a Section 8 company, a registered public trust, a registered society, the beneficiaries of the project, or a public authority. It shall not be held by the company or its employees. This ensures that the assets serve the community and are not appropriated for private benefit.
One of the most significant provisions introduced by the Companies (Amendment) Act, 2019 and the 2021 Rules relates to the mandatory transfer of unspent CSR amounts:
If the unspent amount relates to an ongoing project (a multi-year project not exceeding three financial years, excluding the financial year of commencement), the company must transfer the unspent amount to a special bank account called the Unspent Corporate Social Responsibility Account within 30 days from the end of the financial year. This amount must be spent within three financial years from the date of transfer, failing which it must be transferred to a Fund specified in Schedule VII.
If the unspent amount does not relate to any ongoing project, the company must transfer such amount to a Fund specified in Schedule VII within six months from the end of the financial year. Specified Funds include the Prime Minister’s National Relief Fund, PM CARES Fund, and other funds notified by the Central Government.
Every company to which CSR provisions apply must file an annual report on CSR in Form CSR-2 as an addendum to Form AOC-4 or AOC-4 XBRL. The CSR-2 report contains comprehensive details including:
In addition, the Board’s Report must contain an annual report on CSR as per the format prescribed in the Annexure to the CSR Rules. This is also attached to the annual return and compliance documents filed with the Registrar of Companies.
Companies with an average CSR obligation of ₹10 crore or more in the three immediately preceding financial years are required to undertake an impact assessment of their CSR projects. This requirement was introduced by the 2021 Amendment Rules and applies to CSR projects having an outlay of ₹1 crore or more that have been completed not less than one year before the assessment.
The impact assessment requirement ensures accountability and transparency in CSR spending. It shifts the focus from mere compliance (spending the requisite amount) to measuring actual outcomes and impact on beneficiaries. Companies are encouraged to adopt robust monitoring frameworks to track the progress of their CSR initiatives throughout the project lifecycle.
The Companies (Amendment) Act, 2020 introduced stringent penalties for CSR non-compliance. Section 135(7) provides:
| Defaulter | Penalty |
|---|---|
| Company | Twice the amount required to be transferred to the Unspent CSR Account or the specified Fund, or ₹1 crore, whichever is less |
| Every officer in default | One-tenth of the amount required to be transferred to the Unspent CSR Account or specified Fund, or ₹2 lakh, whichever is less |
It is critical to note that the penalty is in addition to the obligation to transfer the unspent amount. The company must still transfer the unspent CSR amount to the Unspent CSR Account or the specified Fund, as applicable. The penalty regime shifted from the earlier “comply or explain” approach to a mandatory “comply or face penalty” framework.
CSR expenditure does not automatically qualify for tax deduction under the Income Tax Act, 1961. Section 37(1) of the Income Tax Act specifically excludes CSR expenditure from the ambit of business expenditure deductions. However, if the CSR expenditure is of a nature that independently qualifies for deduction under specific provisions (such as contributions to the PM National Relief Fund under Section 80G), the deduction may be claimed to the extent permissible.
The Central Board of Direct Taxes has clarified that expenditure incurred on activities notified under Section 35(2AA) (scientific research) or Section 35AC (eligible projects) may continue to be claimed where the CSR activity independently satisfies those provisions.
Professional assistance from a practising company secretary ensures that CSR governance, documentation, and statutory filings are handled accurately and within prescribed timelines.
Yes. CSR provisions under Section 135 apply to every company — whether public or private, listed or unlisted — that meets any one of the three applicability thresholds (net worth ₹500 crore+, turnover ₹1,000 crore+, or net profit ₹5 crore+) during the immediately preceding financial year. There is no exemption based on the type or class of company.
If the amount to be spent on CSR does not exceed ₹50 lakh in a financial year, the company is exempt from constituting a CSR Committee. The functions of the CSR Committee shall be discharged by the Board of Directors directly. However, the company must still spend the prescribed amount on CSR activities and comply with all reporting requirements including filing Form CSR-2.
No. Rule 2(1)(d) of the CSR Rules expressly provides that activities benefiting only the employees of the company and their families shall not be considered CSR activities. The intent of CSR is to benefit the community and society at large. However, employees may volunteer in CSR activities, and such volunteering may be counted as part of CSR implementation (though not as CSR expenditure).
Yes. The penalty under Section 135(7) is in addition to the obligation to transfer the unspent CSR amount. The company must first transfer the unspent amount to the Unspent CSR Account (for ongoing projects) or to a Fund specified in Schedule VII (for other cases), and additionally pay the penalty imposed for the default. The penalty for the company is twice the amount required to be transferred or ₹1 crore, whichever is less.
Yes. Under Rule 7(3) of the CSR Rules, if a company spends an amount in excess of its CSR obligation in a financial year, the excess may be set off against the CSR requirement for the immediately succeeding three financial years, subject to the following conditions: (a) the excess spending is not from a surplus arising out of CSR activities, (b) the Board passes a resolution to that effect, and (c) the details are disclosed in the Board’s Report and Form CSR-2.
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India became one of the first countries in the world to mandate corporate social responsibility through legislation. The Companies Act, 2013 introduced Section 135, which came into effect on 1 April 2014. The provision was further strengthened by the Companies (CSR Policy) Amendment Rules, 2021, which brought in significant changes including mandatory registration of implementing agencies, impact assessment requirements, and stricter transfer provisions for unspent CSR amounts.
Section 135(1) prescribes three alternative thresholds. A company triggers CSR obligations if, during the immediately preceding financial year, it meets any one of the following criteria:
CSR expenditure must be directed towards activities falling within the ambit of Schedule VII of the Companies Act, 2013. The Schedule provides a broad framework, and companies have flexibility in choosing specific projects within these categories:
A landmark change introduced by the 2021 Amendment Rules is the requirement for mandatory registration of entities undertaking CSR activities on behalf of companies. Every entity (other than the company itself) that intends to undertake CSR activities must file Form CSR-1 electronically with the Ministry of Corporate Affairs and obtain a unique CSR Registration Number.