Section 135 CSR — Companies Act 2013 Corporate Social Responsibility Mandate

Definition

Section 135 of the Companies Act 2013 introduced India’s mandatory Corporate Social Responsibility (CSR) regime — making India the first country globally to legislate a fixed-percentage CSR spend obligation on qualifying companies. The provision came into force on 1 April 2014 and has been amended multiple times since (most consequentially by the Companies (Amendment) Act 2019 which made the CSR spend obligation mandatory rather than “comply or explain”).

Section 135 requires every qualifying company to spend at least 2% of its average net profits of the three immediately preceding financial years on CSR activities listed in Schedule VII of the Act.

Applicability — the three thresholds

Section 135 applies to any company (private, public, listed, unlisted) that, in the immediately preceding financial year, satisfies any one of the following three thresholds:

Net worth ≥ ₹500 crore, OR
Turnover ≥ ₹1,000 crore, OR
Net profit ≥ ₹5 crore

Once a company crosses any threshold in a given FY, the CSR obligation applies from the following FY. If the company subsequently falls below all three thresholds for three consecutive FYs, the CSR obligation ceases.

Foreign companies with a branch / project office in India are also covered, with applicability tested on Indian-operations basis.

The 2% spend — calculation basis

The 2% obligation is calculated on the average net profit of the three immediately preceding FYs (not the current FY). “Net profit” here is computed per Section 198 of the Companies Act, with specific inclusions / exclusions — broadly the profit before tax adjusted for certain capital gains, dividends from Indian companies, and other prescribed items.

If a company has not completed three FYs since incorporation, the average is calculated for the FYs since incorporation.

CSR Committee

Section 135 requires the Board of qualifying companies to constitute a Corporate Social Responsibility Committee consisting of three or more directors — at least one of whom must be an independent director. The CSR Committee’s responsibilities:

Formulate + recommend the CSR Policy to the Board
Recommend the CSR spend amount each year
Monitor the implementation of the CSR Policy
Report to the Board on CSR activities

For companies where Section 135 applies but an independent director is not legally required (e.g., certain private companies), the CSR Committee may consist of two or more directors without the independent-director requirement.

For companies whose CSR spend obligation is < ₹50 lakh in any FY, the CSR Committee requirement is dispensed with — the Board itself discharges the CSR Committee’s functions.

Schedule VII — qualifying CSR activities

Schedule VII of the Companies Act 2013 lists the categories of activities qualifying as CSR. Spend OUTSIDE Schedule VII does not count toward the 2% obligation. The Schedule VII categories (illustrative, regularly amended):

Eradicating hunger, poverty, malnutrition; promoting healthcare; safe drinking water
Education, vocational skills, livelihood enhancement, special education, rural sports
Gender equality, women’s empowerment, old-age homes, reducing inequalities faced by socially disadvantaged groups
Environmental sustainability, ecological balance, animal welfare, conservation of natural resources, soil + air + water quality
Protection of national heritage, art, culture; restoration of buildings of historical importance
Measures for the benefit of armed forces veterans, war widows, dependents
Training to promote rural, nationally recognised, Paralympic, or Olympic sports
Contribution to Prime Minister’s National Relief Fund, PM CARES Fund, or other notified central/state funds
Contribution to incubators / research institutes funded by Central / State Government or specified bodies
Rural development projects
Slum area development
Disaster management (relief + rehabilitation + reconstruction)
Specified COVID-19 / pandemic response measures (added by amendment)

CSR activities must be undertaken in India only (with limited exceptions for training of Indian sports personnel representing India).

CSR implementation pathways

Per the Companies (CSR Policy) Rules 2014 (amended 2021), CSR activities can be implemented via:

Direct implementation by the company itself
Implementation through a registered implementing agency — Section 8 companies, registered public trusts, or registered societies with a track record of at least 3 years in CSR work. The agency must register with MCA via Form CSR-1 to be eligible to receive CSR funds.
Collaborative implementation with other companies — multiple companies pooling resources for a joint CSR project

Unspent CSR — Schedule VII fund routing

The 2021 amendments made unspent CSR more rigorous:

Unspent CSR not pertaining to an ongoing project — must be transferred to one of the Schedule VII central government funds within 6 months of FY-end
Unspent CSR pertaining to an ongoing project — must be transferred to a separate “Unspent CSR Account” within 30 days of FY-end and spent within the next 3 FYs (failing which, the residual goes to a Schedule VII fund)

CSR reporting

Two key compliance reports:

CSR section in the Board’s Report (Annual Report)

Per Section 135(4) read with Rule 8 of CSR Policy Rules — detailed disclosure including the CSR Committee composition, CSR Policy summary + web-link, projects undertaken, amount spent vs amount required, reasons for shortfall (where applicable), details of unspent amount and its transfer.

Form CSR-2 — MCA filing

A standalone return filed annually with MCA on the company’s CSR spend particulars. Introduced via the 2022 amendment; filed in addition to (not in place of) the Board’s Report disclosure.

CSR + BRSR linkage

Section 135 CSR data feeds directly into BRSR disclosures in three places:

Section A of BRSR — direct CSR particulars: applicability of Section 135, CSR registration (where the company runs its own implementing agency), CSR spend amount, CSR projects summary
Principle 8 (Inclusive Growth and Equitable Development) — narrative on the social-development impact of CSR projects, especially those aligned with rural development, education, and livelihoods. See the Principle 8 reference.
Principle 4 (Stakeholder Engagement) — engagement with beneficiary communities of CSR projects feeds into the stakeholder-engagement narrative. See the Principle 4 reference.

The CSR data in BRSR should reconcile to the CSR Committee report + Form CSR-2 filing + the Annual Report’s CSR section. Divergence across these surfaces is a common assurance finding.

CSR penalty regime

The Companies (Amendment) Act 2019 introduced penalties for non-compliance with Section 135 (subsequently moderated):

Failure to transfer unspent CSR to Schedule VII fund (non-ongoing-project) — company penalty + officer-in-default penalty (twice the amount required to be transferred, or ₹1 crore, whichever is lower; for officers, one-tenth of that or ₹2 lakh, whichever is lower)
Failure to transfer to Unspent CSR Account (ongoing-project) — similar penalty structure
Penalty is imposed by the Adjudicating Officer; appealable to the Regional Director

The Companies (Amendment) Act 2020 reclassified many earlier criminal offences to civil penalties — Section 135 non-compliance is now penalty-based, not prosecution-based.

Common questions

Is CSR a tax-deductible expense? Generally no. Section 37 of the Income Tax Act explicitly disallows CSR expenditure as a business deduction. Specific contributions — e.g., to Prime Minister’s National Relief Fund — may qualify under Section 80G as donations (separate from CSR mechanism).

Can a company exceed its 2% CSR obligation and carry forward the excess? Yes, per the 2021 amendments. The excess can be set off against the CSR obligation in subsequent FYs (within 3 succeeding FYs) provided the CSR Committee passes a resolution to that effect.

Does CSR apply to LLPs or partnership firms? No. Section 135 applies only to companies registered under the Companies Act 2013 (or earlier Companies Acts). LLPs governed by the LLP Act 2008 are outside Section 135 scope.

Is BRSR Core assured over the CSR figure? BRSR Core covers 9 specified attributes — CSR itself is not one of them. The CSR disclosure in BRSR Section A is part of the broader BRSR Format but sits outside the BRSR Core reasonable-assurance set. Extended-scope assurance can be requested over CSR figures specifically. For BRSR Core scope, see the BRSR Core glossary entry.