CSR Compliance under Section 135

TL;DR

Companies meeting any of the Section 135(1) thresholds — net worth ₹500 crore, turnover ₹1,000 crore, or net profit ₹5 crore — must constitute a CSR committee, spend 2% of average net profits on CSR, and file Form CSR-2.

Corporate Social Responsibility (CSR) under Section 135 of the Companies Act, 2013 is mandatory for companies that meet specific financial thresholds. The CSR obligation is to spend at least 2% of the average net profits of the preceding three FYs on qualifying CSR activities. The compliance includes constituting a CSR committee. It also includes formulating a CSR policy, executing the activities, and reporting the spend in the annual return.

Applicability — When CSR Applies

A company must comply with Section 135 if it meets any of the following thresholds in the immediately preceding FY:

Net worth of ₹500 crore or more.
Turnover of ₹1,000 crore or more.
Net profit of ₹5 crore or more.

The test is “any of the three”. A company with ₹600 crore net worth and ₹200 crore turnover (and a small net profit) is still required to comply. A company with ₹200 crore net worth but ₹1,200 crore turnover is also required.

For foreign companies, the same thresholds apply based on the Indian operations.

If a company meets any of the three thresholds in a given FY, the CSR obligation applies from the immediately succeeding FY. The trigger FY’s financials determine eligibility for the next year’s CSR spend.

The CSR Committee

A 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 (for listed companies and prescribed classes of public companies). For a private company or an unlisted public company that has no independent director on its Board, the requirement of an independent director is not applicable. The committee can be constituted with the existing directors. The minimum is three directors, or two directors where the company has only two directors on the Board.

The CSR Committee’s role:

Formulate and recommend to the Board the CSR Policy.
Recommend the CSR projects or activities to be undertaken.
Monitor the implementation of the CSR Policy.
Submit a report to the Board on the CSR activities.

The Board is responsible for approving the CSR Policy. The Board ensures the CSR activities are undertaken. The Board discloses the spend in the annual report.

The CSR Spend — 2% of Average Net Profits

The CSR obligation is to spend at least 2% of the average net profits of the preceding three FYs on qualifying CSR activities.

“Net profit” is as computed under Section 198 of the Companies Act. It is the profit before tax as per the P&L. It excludes capital gains, set-off or carry forward of losses, and certain other adjustments.

The average is calculated as:

Average Net Profit = (Net Profit FY1 + Net Profit FY2 + Net Profit FY3) / 3

If a company has only been in existence for 2 years, the average is over the 2 years. If the company has been in existence for only 1 year (the year of incorporation), the average is over that 1 year.

If any of the preceding 3 years had a loss, the loss is treated as zero for the average calculation. The loss is not deducted from the profits of the other years.

The CSR spend is computed on the average net profit. For example:

FY 2021-22: Net profit ₹8 crore.
FY 2022-23: Net profit ₹10 crore.
FY 2023-24: Net profit ₹12 crore.
Average: ₹10 crore.
CSR obligation for FY 2024-25: 2% times ₹10 crore = ₹20 lakh.

Qualifying CSR Activities

The qualifying activities are listed in Schedule VII of the Companies Act. The current Schedule VII includes:

Eradicating hunger, poverty, and malnutrition.
Promoting education, vocational skills, and livelihood enhancement.
Promoting gender equality, empowering women, and reducing inequalities.
Ensuring environmental sustainability, ecological balance, and protection of flora and fauna.
Protection of national heritage, art, and culture.
Benefit of armed forces veterans, war widows, and their dependents.
Training to promote rural sports, nationally recognised sports, and Paralympic sports.
Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central or State Government for socio-economic development.
Contribution to incubators funded by Central or State Government.
Contribution to public-funded universities, IITs, national laboratories, etc.
Rural development projects.
Slum area development.
Disaster management, including relief, rehabilitation, and reconstruction.

The activity must be undertaken in India. CSR spending outside India (other than for training Indian sports personnel for participation in international events) is not allowed.

The activity must not be for the benefit of the company’s employees or their families. CSR for own employees is not qualifying.

The Modes of CSR Spend

The CSR spend can be made through:

Direct implementation by the company itself (through a CSR team or a Section 8 company set up by the company).
Implementing agencies — Section 8 companies, registered public trusts, registered societies (under specific conditions).
Collaborative projects with other companies (forming a pooled CSR fund).
Contribution to notified funds — Prime Minister’s National Relief Fund, Swachh Bharat Kosh, Clean Ganga Fund, etc.

For implementing agencies, the agency must have a 3-year track record of working in the relevant area. The agency must be registered with the MCA portal as an implementing agency.

The Reporting — Form CSR-2

The CSR spend is reported in Form CSR-2, filed separately with the RoC as a standalone form. The standalone filing was introduced by the 2021 amendment. The form is filed on the MCA portal within the prescribed timeline. For FY 2024-25 onwards, Form CSR-2 must be filed separately within 30 days of the Board’s report.

Form CSR-2 includes:

The CSR obligation for the FY (2% of average net profit).
The amount spent (with details of projects and implementing agencies).
The reason for any shortfall (if the company spent less than 2%).
The transfer to the Unspent CSR Account (for ongoing projects).
The transfer to the PM CARES Fund or other notified funds (for amounts not spent for any reason).

The Board is responsible for ensuring the form is accurate.

The Penalties

Under Section 135(7) (as amended by the Companies (Amendment) Act, 2020), if a company fails to spend the CSR amount:

The company is liable to a fine of twice the amount that was not spent, or ₹1 crore, whichever is lower.
Every defaulting officer of the company is liable to a fine of 1/10th of the amount that was not spent, or ₹2 lakh, whichever is lower.
Imprisonment of officers is no longer the prescribed penalty for non-compliance under Section 135(7). Prosecution and imprisonment may apply in cases of fraud under Section 447 or other applicable provisions.

The penalty is levied after a notice from the RoC and a hearing. In practice, the penalty is the lower of the prescribed limits unless the default is egregious.

The Common Triggers for Non-Compliance

Trigger 1 — Company crossed the threshold for the first time

A growing company that crossed the threshold in FY 2024-25 must comply from FY 2025-26 onwards. If the company does not constitute the CSR committee or formulate the CSR policy in FY 2025-26, it is non-compliant.

Trigger 2 — Inadequate spend

The company spends 1.5% instead of 2%. The shortfall is 0.5%. The company must either spend the additional 0.5% before the end of the FY or transfer the shortfall to the Unspent CSR Account.

Trigger 3 — CSR spend through non-qualifying channels

The company donates to a registered trust that does not have a 3-year track record. The spend is non-qualifying. The company must rectify by spending through a qualifying channel or treat the amount as non-spent.

Trigger 4 — Late filing of Form CSR-2

The form is filed late. The penalty is the late fee under Section 403 (typically ₹200 per day). The form itself must still be filed.

The Single Most Important Advice

Track the threshold crossing year-on-year. If the company crossed the threshold in FY 2024-25, the CSR obligation starts in FY 2025-26. Constitute the CSR committee in the first quarter of FY 2025-26. Formulate the CSR policy. Identify the qualifying activities and implementing agencies. Spend the 2% before 31 March 2026. File Form CSR-2 by 30 April 2026.

The discipline pays off in compliance and in the annual report disclosure.

When to Get Help

If your company is on the threshold (for example, net worth of ₹480 crore, turnover of ₹950 crore), the calculation is non-trivial. A company secretary or an expert-led team typically handles the threshold assessment, the CSR committee, the policy formulation, and the Form CSR-2 filing.

We routinely handle CSR compliance for clients. Our annual compliance service covers the threshold assessment, the CSR committee constitution, the policy formulation, the spend tracking, and the Form CSR-2 filing. Share your company details on WhatsApp for a no-charge review.

For the related annual return filings, see our Annual ROC filing guide. For the related KYC obligations of directors, see our Director KYC (DIR-3 KYC) guide.

Frequently Asked Questions

Which companies must comply with Section 135?

A company must comply if it meets any of these thresholds in the immediately preceding FY: net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more. The test is “any one of the three”.

Can a company carry forward unspent CSR funds?

Yes. Any unspent amount must be transferred to the Unspent CSR Account within 5 years. The company can spend that amount in the next FY. However, if it fails to spend within 3 years, the unspent amount must be transferred to a fund specified in Schedule VII (such as PM National Relief Fund).

What is the penalty for not spending 2% on CSR?

The unspent amount is treated as non-compliant. The company must transfer it to the Unspent CSR Account. If the amount remains unspent after 3 consecutive FYs, it must be transferred to the PM National Relief Fund or a similar fund. There is no direct monetary penalty, but the board is required to report non-compliance in the annual report.

What activities qualify for CSR spending?

Schedule VII of the Companies Act lists qualifying activities. These include poverty and hunger eradication, education, healthcare, gender equality, environmental sustainability, rural development, and disaster relief. The activity must be conducted in India.

Does a company below the CSR threshold need to file Form CSR-2?

No. Form CSR-2 is filed only by companies that are required to comply with Section 135. A company that does not meet the thresholds has no CSR obligation and no filing requirement.

Sources

MCA — Form CSR-2, Form AOC-4, Form MGT-7
Companies Act, 2013 — Section 135, Schedule VII
Companies (Corporate Social Responsibility Policy) Rules, 2014