CSR and Section 135 of the Companies Act

In short

Corporate Social Responsibility (CSR) is a company's accountability for the social and environmental effects of its operations, and in India it is a statutory duty, not voluntary charity. Section 135 of the Companies Act, 2013, with the Companies (CSR Policy) Rules, 2014, made India the first country to mandate CSR spending — qualifying companies must spend at least 2% of their average net profit of the three preceding financial years on activities listed in Schedule VII. For a BSW graduate this is a major employment field: CSR foundations, implementing NGOs and consultancies hire social workers as CSR officers, programme coordinators, baseline/impact assessors and community mobilisers. It is examined in Fields of Practice and Social Welfare Administration papers, in NET/SET and MSW entrance tests, and asked in interviews at corporate foundations (Tata Trusts, Reliance Foundation, Azim Premji Foundation, Infosys Foundation) and at implementing agencies. The regulator is the Ministry of Corporate Affairs (MCA); the Registrar of Companies and the Board, not a social ministry, enforce it.

Explained

What CSR is and how it is theorised

• Definition (Rule 2(1)(d), CSR Rules): CSR means activities undertaken by a company in pursuance of its statutory obligation under Section 135 in accordance with the CSR Rules — but *excludes* activities in the normal course of business, activities outside India (except training of Indian sportspersons), contributions to political parties, employee-benefit-only activities, sponsorships for marketing benefit, and statutory obligations under any other law.
• Carroll's pyramid (standard exam model): economic → legal → ethical → philanthropic responsibilities; CSR in India legally fixes a floor on the philanthropic tier.
• Triple bottom line (Elkington): people, planet, profit — social, environmental and economic performance reported together.
• Stakeholder theory (Freeman): the company owes duties to employees, community, consumers, suppliers and environment, not only shareholders; opposed to Friedman's shareholder-primacy view that profit maximisation is the sole duty.
• Related frameworks: UN Global Compact (ten principles), UN Sustainable Development Goals (SDGs), ISO 26000 (guidance on social responsibility — guidance, not certifiable), and SEBI's BRSR (Business Responsibility and Sustainability Report), mandatory for the top 1,000 listed companies by market capitalisation, with assurance of selected "BRSR Core" indicators phased in for the largest listed companies.
• Evolution in India: Gandhian trusteeship and community philanthropy (Tata, Birla, Godrej) → PSU CSR guidelines (DPE) → voluntary guidelines, 2009 → National Voluntary Guidelines, 2011 → statutory from 1 April 2014 → major amendments by the Companies (Amendment) Acts of 2019 and 2020 and revised Rules notified 22 January 2021.

Section 135: applicability, machinery and spend

• Trigger (Section 135(1)) — any ONE of these in the immediately preceding financial year: net worth of ₹500 crore or more; or turnover of ₹1,000 crore or more; or net profit of ₹5 crore or more. Applies to every company including a holding, subsidiary and a foreign company having a branch or project office in India.
• CSR Committee: three or more directors, of which at least one independent director. A company not required to appoint an independent director may constitute it with two directors. If the CSR obligation is up to ₹50 lakh, the committee is not required and the Board discharges its functions.
• Committee's functions: formulate and recommend the CSR policy indicating Schedule VII activities; recommend the amount of expenditure; monitor the policy; and formulate an annual action plan.
• Board's duties: approve and disclose the CSR policy on the website, ensure implementation, and ensure the amount is actually spent; the CFO must certify that CSR funds were utilised for the approved purpose.
• Spend (Section 135(5)): at least 2% of the average net profit of the three immediately preceding financial years. A company in existence for less than three financial years uses the average of such preceding years as exist.
• Net profit (Section 135 explanation): profit before tax computed as per Section 198, excluding profits from overseas branches and dividend received from another Indian company already complying with Section 135.
• Local area preference: the Board shall give preference to the local area and areas around which the company operates — a direction, not a binding quota.
• Reason for shortfall: if the amount is not spent, the Board must specify the reasons in its report *and* transfer the unspent amount as below.

Schedule VII: permitted activities

1. Eradicating hunger, poverty and malnutrition; promoting healthcare including preventive healthcare; sanitation (including Swachh Bharat Kosh); safe drinking water.
2. Promoting education, including special education and employment-enhancing vocational skills, especially among children, women, the elderly and the differently abled; livelihood enhancement projects.
3. Promoting gender equality; empowering women; homes and hostels for women and orphans; old-age homes, day-care centres; measures for reducing inequalities faced by socially and economically backward groups.
4. Environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources, maintaining quality of soil, air and water (including the Clean Ganga Fund).
5. Protection of national heritage, art and culture; restoration of buildings and sites of historical importance; public libraries; promotion and development of traditional arts and handicrafts.
6. Benefit of armed forces veterans, war widows and their dependents; Central Armed Police Forces and Central Para Military Forces veterans and their dependents including widows.
7. Training to promote rural sports, nationally recognised sports, Paralympic and Olympic sports.
8. Contribution to the Prime Minister's National Relief Fund, PM CARES Fund, or any other Central Government fund for socio-economic development and relief and welfare of SC/ST, OBC, minorities and women.
9. (a) Contribution to incubators or research and development projects in science, technology, engineering and medicine funded by the Centre, State, PSU or any Central/State agency; (b) contributions to public-funded universities, IITs, national laboratories and autonomous bodies under ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and IT engaged in conducting research in these fields.
10. Rural development projects.
11. Slum area development.
12. Disaster management, including relief, rehabilitation and reconstruction activities.
13. Reading rule: Schedule VII is read liberally (MCA General Circular 21/2014) so as to capture the essence of the subjects, but an activity outside the Schedule is not CSR, however socially useful.

Implementation, transfer of unspent money and set-off

• Who may implement (Rule 4): the company itself; or a Section 8 company, registered public trust or registered society established by the company (singly or with other companies) or by the Central or a State Government; or any other Section 8 company, registered public trust or registered society that holds income-tax registration and approval (12A/80G under the 1961 Act, now the corresponding provisions of the Income-tax Act, 2025) and has a track record of at least three years in similar activities; or an entity established under an Act of Parliament or a State legislature. Every implementing agency needs a CSR Registration Number from Form CSR-1.
• Form CSR-1: every implementing agency must register with the MCA and file CSR-1 (mandatory for projects from 1 April 2021); the company cannot route funds to an unregistered agency.
• Form CSR-2: separate report on CSR filed with the Registrar; filing deadlines have been extended/altered several times, so verify the current due date on the MCA portal.
• Administrative overheads: capped at 5% of total CSR expenditure of the year; this covers general management of CSR, not the project implementation cost.
• Impact assessment: compulsory for a company with average CSR obligation of ₹10 crore or more in the three preceding financial years, through an independent agency, for projects of ₹1 crore or more completed at least one year before. Its cost may be booked to CSR up to 2% of total CSR expenditure or ₹50 lakh, whichever is higher.
• Unspent — non-ongoing project: transfer to a Schedule VII fund (e.g. PM National Relief Fund, PM CARES, Clean Ganga Fund) within six months of the end of the financial year.
• Unspent — ongoing project: transfer within 30 days of the end of the financial year to a separate "Unspent CSR Account" with a scheduled bank; spend it on that project within three financial years; any residue goes to a Schedule VII fund within 30 days of the end of the third year.
• Ongoing project: a multi-year project with a timeline not exceeding three years excluding the year of commencement (plus a one-year project later reclassified as ongoing by the Board on reasonable justification).
• Set-off: excess spending in a year may be set off against the obligation of the immediately succeeding three financial years, if the Board passes a resolution and the excess does not include surplus from CSR activities.
• Surplus: any surplus from CSR activities shall not form part of business profit — it must be ploughed back into the same project, or into the Unspent CSR Account, or transferred to a Schedule VII fund within six months.
• Capital asset: a CSR capital asset may be held only by a CSR-1 registered Section 8 company/trust/society, or by beneficiaries as self-help group/collective, or by a public authority.
• Penalty (Section 135(7), from 2020): on the company, twice the unspent amount required to be transferred, or ₹1 crore, whichever is less; on every defaulting officer, one-tenth of the unspent amount required to be transferred, or ₹2 lakh, whichever is less. CSR default was decriminalised — it is a civil penalty adjudicated by the Registrar, not imprisonment.
• CSR is not a tax deduction by default: CSR expenditure is expressly disallowed as business expenditure; relief, where available, comes only through the separate donation-based deduction provision (now in the Income-tax Act, 2025, which replaced the Income-tax Act, 1961 from 1 April 2026 and renumbered all sections) for specific funds and institutions. The exact section number and the treatment of particular funds should be checked against the 2025 Act's text.

The CSR project cycle — where social work practice fits

1. Need assessment / baseline: participatory tools (PRA, focus groups, household survey), secondary data (Census, NFHS, district HDI), stakeholder mapping; produces the evidence for the annual action plan.
2. Annual action plan: list of approved projects, manner of execution (self or implementing agency), modalities of fund utilisation, implementation schedules, monitoring and reporting mechanism, need and impact assessment where applicable.
3. Partner due diligence: registration documents, CSR-1 number, income-tax registration and approval (12A/80G, now under the Income-tax Act, 2025), three-year track record where required, audited accounts, governance and FCRA position if foreign funds are involved.
4. MoU and budgeting: deliverables, milestones, fund-release tranches, admin cost within the 5% cap, exit and asset-ownership clauses.
5. Implementation and monitoring: logframe with input–activity–output–outcome–impact indicators, MIS, field visits, utilisation certificates, community grievance route.
6. Impact assessment and reporting: independent evaluation, disclosure in the Board's report annexure and on the website, Form CSR-2, CFO certificate.
7. Social work methods used: community organisation, project management, documentation, monitoring and evaluation, social audit and advocacy.

Advantages, criticisms and comparisons

• Advantages: predictable, large pool of development finance (annual reported CSR spend has run in the order of ₹25,000–30,000 crore in recent years — check the MCA National CSR Portal for the current figure); professionalised NGO practice; disclosure and board-level accountability; employment for trained social workers.
• Limitations: "comply or explain" became "comply or pay", so some spending is cheque-writing to Schedule VII funds; geographic concentration in Maharashtra, Gujarat, Karnataka, Tamil Nadu and the NCR, with low flow to the north-east and aspirational districts; sectoral skew towards education and health, little to environment or gender; short project horizons against long social change timelines; weak outcome measurement; risk of CSR being used as reputation management ("greenwashing" / "bluewashing").
• CSR vs philanthropy: statutory, policy-driven, audited and disclosed vs voluntary, discretionary and unreported.
• CSR vs sustainability/ESG: CSR is spending outside the business on Schedule VII heads; ESG and BRSR assess how the core business itself performs on environment, social and governance measures.
• CSR vs FCRA funding: CSR is domestic corporate money under MCA regulation; FCRA, 2010 governs foreign contribution under the Ministry of Home Affairs, requires an SBI New Delhi Main Branch designated account, and caps administrative expenses at 20% — the two cannot be mixed in one account.

Key points

• Section 135 - the CSR provision of the Companies Act, 2013, effective 1 April 2014; India's mandatory CSR law.
• Triple threshold - net worth ≥ ₹500 crore, or turnover ≥ ₹1,000 crore, or net profit ≥ ₹5 crore in the immediately preceding financial year.
• 2% rule - minimum spend is 2% of the average net profit of the three immediately preceding financial years.
• Section 198 profit - the net profit base for CSR is profit before tax computed under Section 198, excluding overseas branch profit and dividends from compliant Indian companies.
• Schedule VII - the closed list of twelve permitted CSR heads, read liberally but not extendable at will.
• CSR Committee - three or more directors including one independent director; not required if the obligation is ₹50 lakh or less.
• Annual action plan - Board-approved list of projects, execution mode, fund modalities, schedules and monitoring design.
• Form CSR-1 - mandatory MCA registration of every implementing agency; an agency not set up by the company or a Government must also have a three-year track record.
• Form CSR-2 - the separate CSR report filed with the Registrar; due dates have shifted, so confirm the current one.
• Administrative overheads cap - 5% of total CSR expenditure for the financial year.
• Impact assessment - mandatory for average CSR obligation ≥ ₹10 crore, by an independent agency, for projects ≥ ₹1 crore completed a year earlier.
• Ongoing project - multi-year project not exceeding three years excluding the commencement year.
• Unspent CSR Account - separate scheduled-bank account for unspent ongoing-project money, funded within 30 days of year end, usable for three years.
• Six-month rule - unspent non-ongoing money goes to a Schedule VII fund within six months of the financial year end.
• Set-off - excess CSR spend can be carried against the next three years' obligations by Board resolution.
• Civil penalty - up to twice the unspent amount or ₹1 crore (company) and one-tenth or ₹2 lakh (officer); no imprisonment.
• Not deductible - CSR spend is disallowed as business expenditure; only specified fund donations attract a deduction under the income-tax law.
• Excluded - political contributions, employee-only benefits, marketing sponsorships, normal business activity, spending outside India (except Indian sportspersons' training).

Formulas and examples

Example 1 — Basic obligation and committee. A company reports Section 198 net profits of ₹40 crore (FY 2023-24), ₹55 crore (FY 2024-25) and ₹70 crore (FY 2025-26). Net worth ₹620 crore.

• Applicability: net worth ₹620 crore ≥ ₹500 crore → Section 135 applies.
• Average net profit = (40 + 55 + 70)/3 = 165/3 = ₹55 crore.
• CSR obligation = 2% × 55 = ₹1.10 crore for FY 2026-27.
• Obligation exceeds ₹50 lakh → a CSR Committee of three or more directors with one independent director is required.
• Administrative overheads if the full ₹1.10 crore is spent = 5% × 1.10 = ₹5.5 lakh.

Example 2 — Shortfall, ongoing project and transfer deadlines. Obligation ₹1.10 crore. Actual spend ₹80 lakh. Of the unspent ₹30 lakh, ₹18 lakh belongs to a Board-approved three-year school-infrastructure project and ₹12 lakh to a one-year health camp that was dropped.

• Shortfall = 110 − 80 = ₹30 lakh.
• Ongoing portion ₹18 lakh → transfer to the Unspent CSR Account within 30 days of 31 March, i.e. by 30 April; spend within the next three financial years.
• Non-ongoing portion ₹12 lakh → transfer to a Schedule VII fund within six months, i.e. by 30 September.
• Had nothing been transferred, maximum company penalty = min(2 × 30 lakh, ₹1 crore) = ₹60 lakh; officer penalty = min(30/10, ₹2 lakh) = ₹2 lakh (one-tenth of the ₹30 lakh unspent is ₹3 lakh, so the ₹2 lakh cap applies).

Example 3 — Excess spend and set-off. Obligation for FY 2026-27 is ₹1.10 crore; the company spends ₹1.50 crore, including ₹4 lakh of surplus generated from a CSR asset.

• Gross excess = 150 − 110 = ₹40 lakh; surplus of ₹4 lakh is excluded → eligible set-off = ₹36 lakh.
• With a Board resolution, ₹36 lakh may be set off against the obligations of FY 2027-28, FY 2028-29 and FY 2029-30.
• If FY 2027-28 obligation is ₹1.20 crore, the company must spend at least 120 − 36 = ₹84 lakh that year.

Example 4 — Impact assessment liability. Average CSR obligation over FY 2023-24 to FY 2025-26 = (₹9 cr + ₹10 cr + ₹14 cr)/3 = 33/3 = ₹11 crore ≥ ₹10 crore → impact assessment is mandatory for FY 2026-27.

• Projects of ₹1 crore or more completed at least one year earlier must be evaluated by an independent agency.
• If total CSR expenditure in FY 2026-27 is ₹11 crore, 2% = ₹22 lakh; the ceiling is the higher of ₹22 lakh and ₹50 lakh = ₹50 lakh chargeable to CSR.

Example 5 — Applicability borderline. Company A: net worth ₹120 crore, turnover ₹300 crore, net profit ₹5.2 crore. Company B: net worth ₹480 crore, turnover ₹900 crore, net profit ₹4.6 crore.

• A crosses the net-profit limit (₹5.2 crore ≥ ₹5 crore) → covered.
• B crosses none of the three → not covered, even though it is larger overall.

Where it is used

• Corporate foundations and CSR departments: Tata Steel Foundation, Reliance Foundation, HDFC Parivartan, Infosys Foundation, Azim Premji Foundation, Mahindra Rise, Hindustan Unilever Foundation, ITC Mission Sunehra Kal — roles as CSR executive, programme officer, community mobiliser, M&E officer.
• Implementing NGOs: Pratham, Smile Foundation, CRY, SEWA, Akshaya Patra, Goonj and thousands of CSR-1 registered trusts and Section 8 companies delivering education, health, skilling, WASH and livelihood projects.
• PSU CSR: ONGC, NTPC, SAIL, Coal India, IOCL — CSR under Section 135 plus DPE guidelines; often aligned with aspirational districts and government missions such as Swachh Bharat, Jal Jeevan and Skill India.
• CSR consulting, audit and evaluation: Big Four sustainability practices, Sattva, Samhita, Dasra and independent evaluators doing need assessment, impact assessment, social return on investment and BRSR reporting.
• Bank and insurer CSR: SBI Foundation, LIC Golden Jubilee Foundation; also priority-sector-linked financial-literacy and SHG projects run with social-work staff.
• Government interface: MCA National CSR Portal and CSR Exchange, district administrations, DISHA/convergence committees matching corporate funds to local plans.

Interview questions

• Q: Which companies must comply with Section 135? A: Any company whose immediately preceding financial year shows net worth of ₹500 crore or more, or turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more — including foreign companies with a branch or project office in India.
• Q: How exactly is the 2% calculated? A: 2% of the average net profit of the three immediately preceding financial years, where net profit is profit before tax computed under Section 198, excluding overseas branch profit and dividend from another compliant Indian company.
• Q: What happens to money a company fails to spend? A: If it belongs to an ongoing project, it goes to a separate Unspent CSR Account within 30 days of the year end and must be used within three financial years; otherwise it goes to a Schedule VII fund within six months.
• Q: Is CSR still voluntary after the 2020 amendment? A: No. The earlier "comply or explain" position became mandatory spending with a civil penalty of up to twice the unspent amount or ₹1 crore for the company, though it was simultaneously decriminalised.
• Q: Can a company count employee welfare or an NGO sponsorship that carries its logo as CSR? A: No — activities benefiting only employees and their families, and sponsorships undertaken for marketing or brand benefit, are expressly excluded.
• Q: Can CSR funds be spent abroad? A: No, except training of Indian sportspersons representing a State or the country; all other CSR must be spent in India.
• Q: What is Form CSR-1 and why does it matter to an NGO? A: It is the MCA registration through which an implementing agency obtains a CSR Registration Number; without it — and, for an agency not set up by the company or a Government, without a three-year track record — a company cannot legally route CSR funds to that agency.
• Q: When is an impact assessment compulsory, and who pays? A: When the company's average CSR obligation for the three preceding years is ₹10 crore or more, for projects of ₹1 crore or more completed at least a year earlier; the cost is chargeable to CSR up to 2% of CSR spend or ₹50 lakh, whichever is higher.
• Q: Is CSR expenditure tax-deductible? A: Not as business expenditure — it is specifically disallowed. Relief is available only through the separate deduction for donations to specified funds and institutions under the income-tax law now contained in the Income-tax Act, 2025.
• Q: Difference between CSR and BRSR? A: CSR under Section 135 is MCA-regulated spending on Schedule VII heads; BRSR is a SEBI disclosure by the top 1,000 listed companies on how the business itself performs on environmental, social and governance parameters.
• Q: A company wants to build a road to its own factory and call it rural development. Can it? A: No. Anything in the normal course of business or primarily benefiting the company's own operations is not CSR; benefit must flow to the community, not to the business.
• Q: As a social worker in a CSR team, how would you prove a project worked? A: Set a baseline before starting, define output and outcome indicators in a logframe, track them through an MIS with field verification, and commission an independent endline or impact assessment comparing results against the baseline and a comparison group where feasible.
• Q: Can CSR funds be mixed with foreign donations? A: No — foreign contribution is governed by FCRA, 2010 and must sit in the designated SBI New Delhi Main Branch account with its own 20% administrative cap; CSR money is domestic and must be accounted separately.

Common mistakes

• Using profit after tax, or accounting profit, instead of Section 198 profit before tax for the 2% base.
• Taking 2% of the latest year's profit rather than the three-year average, or using the current year instead of the three *preceding* years.
• Testing applicability on the three-year average — the net worth/turnover/net profit thresholds apply to the immediately preceding financial year only.
• Confusing the two transfer deadlines: 30 days for ongoing-project money into the Unspent CSR Account, six months for other unspent money into a Schedule VII fund.
• Claiming CSR as a tax deduction, or assuming that paying the penalty extinguishes the duty to transfer the unspent amount.
• Treating Schedule VII as an open-ended list, or calling any good deed CSR — political donations, employee-only benefits and marketing sponsorships are excluded.
• Forgetting that the implementing partner needs a CSR-1 number (and, if it is an independent NGO, a three-year track record), and that administrative overheads are capped at 5%.
• Writing that CSR default leads to imprisonment — it is a civil penalty adjudicated by the Registrar since the 2020 amendment.

Related topics

• NGO management · Project proposal writing · Social welfare administration · Monitoring and evaluation in social work · FCRA and resource mobilisation · Community organisation and development