Corporate Social Responsibility (CSR) Compliance & Applicability

Corporate Social Responsibility under the Companies Act 2013 is not voluntary once a company crosses the prescribed size thresholds; it is a statutory spending obligation with its own committee, policy, reporting, and unspent-fund transfer requirements. Section 135 sets out who is covered, how much must be spent, and what happens if the company does not spend it, and getting any of these wrong is now a compliance issue with real penalties, not just a governance best practice.

Who Is Covered: The Three Thresholds

A company falls within Section 135 if, in the immediately preceding financial year, it meets any one of the following three criteria:

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

This is an "any one" test, not a cumulative one: a company with a modest turnover and net worth but a strong profit year can still be pulled into CSR applicability purely on the net profit limb. Because applicability is assessed against the preceding year's figures, a company that crosses a threshold in FY 2025-26 becomes subject to CSR obligations for FY 2026-27, not retroactively for the year it crossed the line.

The obligation also does not automatically switch off the moment the company dips below the threshold again; the specific triggers and any transitional relief should be checked each year against the current rules rather than assumed.

The 2% Spend Rule

A covered company must ensure that its board spends, in every financial year, at least 2% of the average net profit made during the three immediately preceding financial years. This average net profit is computed under Section 198 of the Companies Act, a specific formula that adjusts standard book profit for certain add-backs and deductions (such as excluding capital profits and certain provisions), so it will generally not match the profit figure shown in the statutory financial statements without adjustment.

For a company that has not yet completed three financial years of existence, the average is computed over the shorter period the company has actually been in existence. The CSR policy itself, approved by the board on the CSR committee's recommendation, has to specify the activities to be undertaken, which must fall within the categories listed in Schedule VII of the Act (education, healthcare, environmental sustainability, rural development, and similar categories), and cannot simply be discretionary corporate spending dressed up as CSR.

When a CSR Committee Is Required

Every company covered by Section 135 must have a CSR policy, but a dedicated CSR committee of the board is only mandatory where the company's CSR obligation for the year exceeds Rs 50 lakh. Where the computed 2% obligation is Rs 50 lakh or below, the functions that would otherwise sit with the CSR committee, recommending the policy, the amount to spend, and monitoring implementation, can be discharged directly by the board of directors, without constituting a separate committee. This is a common area of confusion: crossing the Section 135 applicability threshold does not automatically mean a company needs a formal committee; the committee requirement is a separate, smaller-amount test layered on top.

Unspent CSR Amounts

If the full CSR amount is not spent in a given year, the treatment depends on whether the shortfall relates to an ongoing project:

• Not related to an ongoing project: the unspent amount must be transferred to a fund specified in Schedule VII (such as the PM CARES Fund or another eligible fund) within six months of the end of the financial year.
• Related to an ongoing project: the unspent amount must instead be transferred to a separate Unspent CSR Account within 30 days of the financial year-end, and then spent on that project within the following three financial years. Any balance still unspent after that three-year window must itself be transferred to a Schedule VII fund.

Failing to make either transfer within the prescribed timeline is treated as a distinct compliance failure from simply under-spending the 2% obligation, and both carry their own consequences.

Penalties for Non-Compliance

Where a company fails to spend the required CSR amount and does not make the corresponding transfer within the prescribed timelines, the company and every officer in default are liable to a monetary penalty under Section 135. Because the unspent-amount transfer deadlines are specific and short (30 days or six months, depending on the category), the more common real-world failure is not a company deciding to skip CSR altogether, but simply missing the transfer window after an ongoing project runs behind schedule.

CSR compliance sits alongside the company's other annual obligations, and the spend, committee, and reporting requirements need to be tracked on the same calendar as the statutory audit and annual ROC filing, since the CSR report forms part of the Board's Report filed with those returns.