Corporate Social Responsibility (CSR) — Section 135 of the Companies Act, 2013

By Sneha Iyer | Updated March 2026

What Is Corporate Social Responsibility (CSR)?

Corporate Social Responsibility (CSR) under Indian law is a mandatory spending obligation imposed by Section 135 of the Companies Act, 2013, read with the Companies (Corporate Social Responsibility Policy) Rules, 2014. Every company — including wholly-owned subsidiaries of foreign companies — that meets any one of three financial thresholds must spend at least 2% of its average net profits (computed over the three immediately preceding financial years) on activities listed in Schedule VII of the Act.

For foreign investors, CSR is not voluntary philanthropy — it is a legal compliance requirement with monetary penalties. If your Indian subsidiary crosses the applicability thresholds, the obligation kicks in automatically. The 2021 amendments introduced penal consequences for non-compliance, converting CSR from a "comply or explain" regime into a "comply or pay" regime. This makes CSR planning essential from the moment you incorporate an Indian entity.

India became the first major economy to mandate CSR spending through legislation when Section 135 took effect on April 1, 2014. As of FY 2024-25, over 23,000 companies collectively spend more than INR 30,000 crore annually on CSR activities. The Companies (Amendment) Bill, 2025, proposes to lower the thresholds further, potentially bringing thousands of mid-sized companies into the CSR net.

Legal Basis

• Section 135 of the Companies Act, 2013 — The primary provision establishing the CSR mandate, the requirement to constitute a CSR Committee, the 2% spending obligation, and disclosure requirements. Effective from April 1, 2014.
• Companies (Corporate Social Responsibility Policy) Rules, 2014 — Detailed rules on computation of net profits, eligible activities, treatment of surplus from CSR activities, administrative overhead cap (5%), and reporting in the annual report.
• Schedule VII of the Companies Act, 2013 — An exhaustive list of 12 categories of eligible CSR activities, ranging from healthcare and education to disaster management and rural development.
• Companies (Amendment) Act, 2020 (effective January 22, 2021) — Introduced Section 135(7) prescribing monetary penalties for non-compliance, mandatory transfer of unspent CSR amounts to a separate Unspent CSR Account, and the requirement for implementing agencies to register via Form CSR-1.
• Companies (CSR Policy) Amendment Rules, 2021 — Operationalised the 2021 amendments: mandatory CSR-1 registration for implementing agencies, impact assessment for companies with average CSR obligation of INR 10 crore or more, and a cap of 5% on administrative overheads.
• Companies (Amendment) Bill, 2025 (pending) — Proposes lowering applicability thresholds to net worth INR 100 crore, turnover INR 500 crore, or net profit INR 3 crore, and mandates at least one CSR-experienced director on the CSR Committee.

Who Must Comply? Applicability Thresholds

CSR applies to every company registered in India — private limited, public limited, one-person company, Section 8 company, or a foreign company with a branch or project office in India — that meets any one of the following thresholds in the immediately preceding financial year:

The assessment is made every financial year. A company that meets the threshold in FY 2024-25 must comply with CSR provisions in FY 2025-26. If the company falls below all three thresholds for three consecutive financial years, the CSR obligation ceases — but any unspent amounts from prior years must still be dealt with.

Foreign-Invested Indian Subsidiaries

Indian subsidiaries of foreign companies are treated identically to domestic companies for CSR purposes. A Singapore-based parent investing via FDI into an Indian subsidiary with net profit of INR 5 crore triggers the full CSR obligation. The foreign parent cannot direct the CSR spend to global programmes — it must be spent in India on Schedule VII activities through an Indian implementing agency registered via Form CSR-1.

The 2% Spending Calculation

The mandatory CSR spend equals 2% of the average net profits of the three immediately preceding financial years, computed under Section 198 of the Companies Act (not as per the Income Tax Act). Key points:

• Section 198 net profit excludes profits from overseas branches, capital gains/losses on sale of undertakings, and certain other adjustments
• For a newly incorporated company, the average is computed from the date of incorporation
• If the company has no net profit or has losses in the preceding three years, no CSR spend is required for that year
• Surplus from CSR activities cannot be treated as business income — it must be ploughed back into CSR
• Administrative overheads are capped at 5% of total CSR expenditure

Calculation Example

Schedule VII: Eligible CSR Activities

CSR funds can only be deployed on activities falling within the 12 categories enumerated in Schedule VII of the Companies Act, 2013. Activities outside this list — even if socially beneficial — do not qualify.

CSR Committee: Composition and Role

Every qualifying company must constitute a CSR Committee of the Board consisting of three or more directors, of which at least one must be an independent director. The Committee is responsible for:

• Formulating the CSR Policy and recommending it to the Board
• Recommending the amount of CSR expenditure
• Monitoring the CSR Policy periodically
• Formulating an annual action plan for CSR implementation

Exceptions to Committee Composition

• Private companies not required to appoint an independent director under Section 149(4): The CSR Committee may consist of two or more directors (no independent director needed)
• Companies with CSR obligation below INR 50 lakh: No separate CSR Committee is required — the Board itself discharges CSR Committee functions
• Foreign companies: The CSR Committee must have at least two persons — one must be a person resident in India authorised to accept service of notices on behalf of the foreign company

Unspent CSR Funds: The 2021 Compliance Trap

The 2021 amendments created a strict regime for unspent CSR amounts. This is the area where foreign-invested subsidiaries most frequently face compliance issues:

• Ongoing projects: Unspent CSR amounts for ongoing projects must be transferred to a separate Unspent CSR Account (opened with a scheduled bank) within 30 days of the end of the financial year. The company has 3 financial years to spend this amount.
• Non-ongoing projects or expired timeline: If the amount remains unspent after 3 years, or if the unspent amount does not relate to an ongoing project, it must be transferred to a Fund specified in Schedule VII (such as the PM National Relief Fund or PM CARES Fund) within 30 days of the end of the financial year (for non-ongoing) or within 30 days of the end of the third financial year (for ongoing projects that remain unspent).

Penalties for Non-Compliance (Section 135(7))

Prior to 2021, non-compliance with CSR was a "comply or explain" obligation — companies simply disclosed reasons for not spending. The Companies (Amendment) Act, 2020 (effective January 22, 2021) inserted Section 135(7), introducing monetary penalties:

The penalty is a one-time levy — there is no additional penalty for continuing default. However, the underlying obligation to spend or transfer the CSR amount persists.

CSR-1 Registration for Implementing Agencies

Since April 1, 2021, every entity undertaking CSR activities on behalf of a company must register with the Central Government by filing Form CSR-1 on the MCA portal. Only the following entities are eligible:

• Section 8 companies registered under the Companies Act
• Societies registered under the Societies Registration Act, 1860
• Trusts registered under the Indian Trusts Act, 1882 or a public trust under any state law

International organisations and foreign entities cannot directly register as implementing agencies. Foreign-invested companies wishing to channel CSR funds through a global CSR programme must partner with a locally registered Indian entity that holds CSR-1 registration. The CSR-1 form requires certification by a practising Company Secretary, Chartered Accountant, or Cost Accountant.

Impact Assessment Requirement

Companies with an average CSR obligation of INR 10 crore or more in the three immediately preceding financial years must undertake an impact assessment of CSR projects with outlays of INR 1 crore or more. The assessment must be conducted by an independent agency, and the cost is capped at 5% of total CSR expenditure or INR 50 lakh, whichever is less. The impact assessment report must be placed before the Board and annexed to the annual report on CSR.

How CSR Affects Foreign Investors in India

CSR compliance is often an unexpected cost and governance burden for foreign companies entering India. Here is what distinguishes the Indian CSR regime:

• Mandatory, not voluntary: Unlike most jurisdictions where CSR is voluntary or limited to disclosure, India mandates actual spending — and penalises shortfalls
• Board-level governance: CSR requires a dedicated Board committee, a formal policy, an annual action plan, and annual reporting in the Directors' Report
• India-only spending: CSR funds must be spent in India on activities benefiting India. Global CSR programmes of the foreign parent do not count
• Local implementing agencies only: Funds must flow through CSR-1 registered Indian entities — not the parent company's global foundation
• The net profit trigger is low: At INR 5 crore (approximately USD 600,000), even modestly profitable subsidiaries cross the threshold. A liaison office does not trigger CSR (it cannot earn profits), but a branch office or subsidiary can
• Proposed threshold reduction: The Companies (Amendment) Bill, 2025 proposes lowering the net profit threshold to INR 3 crore (approximately USD 360,000), bringing even more foreign subsidiaries into scope

Common Mistakes

• Conflating CSR with marketing or employee welfare. Expenditure on activities for the company's own employees, brand-building events, or sponsorships that generate commercial benefit does not qualify as CSR. The MCA has explicitly clarified that CSR activities must benefit the community at large, not the company or its employees.
• Missing the 30-day transfer deadline for unspent amounts. Many foreign subsidiaries assume they can carry forward unspent CSR indefinitely. The law requires transfer to the Unspent CSR Account within 30 days of the financial year-end. Missing this deadline triggers the Section 135(7) penalty — up to twice the amount, capped at INR 1 crore.
• Routing CSR through non-registered entities. Since April 2021, implementing agencies must hold CSR-1 registration. Companies that channel CSR funds through unregistered NGOs or the foreign parent's foundation face disqualification of the expenditure — meaning the amount is treated as "unspent" regardless of actual deployment.
• Using Section 198 net profit and Income Tax Act net profit interchangeably. CSR obligation is computed on net profit under Section 198 of the Companies Act, which has different add-backs and exclusions than taxable profit under the Income Tax Act. Using the wrong figure — even in good faith — leads to under-spending and potential penalties.
• Ignoring CSR reporting in the Board's Report. The annual report must include a CSR report in the prescribed format (Annexure I/II to the CSR Rules). Foreign subsidiaries that file the AOC-4 without the CSR annexure face ROC scrutiny and potential adjudication proceedings.

Practical Example

NovaBridge Technologies GmbH, a German software company, incorporated a wholly-owned subsidiary in India — NovaBridge India Pvt Ltd — in 2021. The subsidiary's financials are:

• FY 2022-23: Net profit INR 3 crore
• FY 2023-24: Net profit INR 7 crore
• FY 2024-25: Net profit INR 11 crore

Step 1 — Applicability check for FY 2025-26: NovaBridge India's net profit in FY 2024-25 was INR 11 crore, exceeding the INR 5 crore threshold. CSR provisions apply for FY 2025-26.

Step 2 — CSR obligation calculation: Average net profit over 3 preceding years = (3 + 7 + 11) / 3 = INR 7 crore. CSR spend required = 2% of INR 7 crore = INR 14 lakh.

Step 3 — CSR Committee: Since CSR obligation (INR 14 lakh) is below INR 50 lakh, NovaBridge India is exempt from constituting a separate CSR Committee. The Board itself can discharge CSR functions.

Step 4 — Implementation: NovaBridge India partners with a CSR-1 registered NGO to fund a digital literacy programme for rural schools in Karnataka (qualifying under Schedule VII item (ii)). The company spends INR 14 lakh by March 31, 2026, and reports the expenditure in its Board's Report and annual CSR return.

What if NovaBridge India spent only INR 8 lakh? The unspent INR 6 lakh must be transferred to the Unspent CSR Account within 30 days of March 31, 2026 (i.e., by April 30, 2026) if it relates to an ongoing project, or to a Schedule VII Fund (PM National Relief Fund, PM CARES, etc.) if the project is non-ongoing. Failure to transfer triggers a penalty of up to twice the unspent amount (INR 12 lakh) or INR 1 crore, whichever is lower — i.e., INR 12 lakh.

Key Takeaways

• CSR under Section 135 is a mandatory spending obligation — not voluntary philanthropy — for every company (including foreign subsidiaries) meeting net worth INR 500 crore, turnover INR 1,000 crore, or net profit INR 5 crore in the preceding year
• The obligation is 2% of average net profits (Section 198 computation) over the three preceding financial years, deployable only on Schedule VII activities
• The 2021 amendments introduced penalties of up to twice the unspent amount (capped at INR 1 crore for companies, INR 2 lakh for officers) and mandatory transfer of unspent amounts within 30 days
• Implementing agencies must hold CSR-1 registration — international organisations and foreign foundations cannot directly receive CSR funds
• Companies with average CSR obligation of INR 10 crore or more must conduct independent impact assessments
• The Companies (Amendment) Bill, 2025 proposes lowering thresholds to net worth INR 100 crore, turnover INR 500 crore, or net profit INR 3 crore — significantly expanding the CSR net for mid-sized companies

Need help structuring your Indian subsidiary's CSR compliance, selecting eligible projects, or filing annual CSR returns? Beacon Filing provides end-to-end annual compliance services including CSR policy drafting, committee advisory, and regulatory reporting.