Corporate Social Responsibility

Corporate Social Responsibility in India: The Complete Section 135 Compliance Guide for FY 2026-27

Under Section 135 of the Companies Act 2013, any company meeting one of three financial thresholds must spend 2% of its average net profit from the three preceding financial years on Schedule VII activities. For FY 2026-27, full compliance means four non-negotiable steps: a CSR-1 registration verified for every implementing agency, a Board-approved annual action plan, a correctly filed Form CSR-2 on MCA V3, and lawful treatment of any unspent balance — or face penalties of up to twice the shortfall amount.

Who Must Comply: The Three Triggers Under Section 135

Section 135(1) applies to every company — Indian-incorporated or foreign — that meets any one of the following thresholds based on the immediately preceding financial year's audited financials:

Several nuances catch finance teams off guard:

• "Immediately preceding financial year" for FY 2026-27 obligations means FY 2025-26. If your company crossed a threshold for the first time in FY 2025-26, your first spend obligation falls in FY 2026-27.
• Net profit for both the threshold test and the 2% calculation is the Section 198 statutory profit, not the P&L profit after tax. Section 198 disallows capital profits on sale of investments, certain dividends received, and requires specific add-backs. Ask your statutory auditor to confirm this figure before the Board fixes the annual budget.
• Foreign companies with a branch or project office in India are covered if they meet the thresholds on the basis of their India-attributed profit or net worth.
• A company that qualifies under the threshold but reports zero or negative Section 198 net profit in all three base years still has governance obligations (constitute a committee, adopt a policy) but its 2% spend obligation is nil for that year. Document this clearly in the Board report to preempt MCA queries.

How to Calculate Your CSR Obligation: Worked Example

Here is a step-by-step calculation for ABC Pharma Ltd preparing for FY 2026-27.

Step 1: Identify the three base financial years For a FY 2026-27 obligation: FY 2023-24, FY 2024-25, FY 2025-26.

Step 2: Confirm Section 198 net profit for each year

Step 3: Compute the three-year average (18 + 22 + 20) ÷ 3 = Rs. 20 crore

Step 4: Apply 2% 2% × Rs. 20 crore = Rs. 40 lakh — this is ABC Pharma's mandatory CSR spend for FY 2026-27.

Step 5: Check CSR Committee trigger The statutory threshold for a formal CSR Committee is a spend obligation exceeding Rs. 50 lakh. ABC Pharma's Rs. 40 lakh obligation falls below this, so the full Board may discharge committee functions. If the obligation had been, say, Rs. 55 lakh, a formal committee of at least three directors — including at least one independent director — would be mandatory.

What about newer companies? A company that has not completed three financial years averages net profit over the years already completed. If only one year is available, use that figure alone.

Permissible CSR Activities: What Schedule VII Actually Covers

Schedule VII defines the universe of permitted CSR activities. MCA has progressively expanded the Schedule through notifications; the current version as of 2026 includes:

1. Eradicating hunger, poverty and malnutrition — mid-day meals, food banks, supplementary nutrition
2. Promoting education — school infrastructure, teacher training, digital literacy, vocational skills, scholarships for first-generation learners
3. Gender equality and women's empowerment — self-help group formation, women-led enterprise support, crèches and hostels
4. Environmental sustainability and climate action — renewable energy projects, watershed management, biodiversity conservation, mangrove restoration, clean air initiatives
5. Protection of national heritage, art and culture
6. Welfare of armed forces veterans, war widows and dependants
7. Sports promotion — particularly for rural athletes and Paralympic athletes
8. PM CARES Fund, PM National Relief Fund, State Disaster Management Authority — direct contributions are permitted as a Schedule VII outlet
9. Slum area development and affordable housing
10. Disaster management — relief, rehabilitation and reconstruction
11. Technology incubators at academic institutions approved by the Central Government
12. Rural development projects — roads, sanitation, digital connectivity in underserved areas

What is explicitly NOT permitted

• Activities that exclusively benefit the company's own employees or their families
• Contributions to political parties under any arrangement
• Activities conducted outside India (narrow exceptions exist for capacity building of Indian nationals)
• Commercially motivated sponsorships dressed up as CSR
• Administrative expenditure exceeding 5% of total CSR expenditure for the financial year — keep a separate ledger for coordination, travel and monitoring costs

The 5% overhead cap is frequently breached by companies that charge their CSR team's full salary, event costs and reporting expenses to the CSR budget without tracking the proportion. If your total CSR spend is Rs. 40 lakh, a maximum of Rs. 2 lakh may be charged as administrative overhead. The remaining Rs. 38 lakh must flow to actual programme delivery.

Setting Up Your CSR Committee and Policy

When a formal committee is mandatory

If your spend obligation exceeds Rs. 50 lakh, you must constitute a CSR Committee of the Board under Section 135(1) with:

• Minimum three directors
• At least one independent director
• For companies not required to appoint an independent director (certain unlisted and private companies), substitute directors may satisfy the requirement

Companies below the Rs. 50 lakh threshold have the Board collectively discharging committee functions — document this explicitly in the Board resolution.

What the CSR Committee must actually do

The committee must produce three formal outputs each year:

1. CSR policy — defines the activity areas, implementation approach and surplus-handling mechanism; must be displayed on the company website under Rule 9 of the Companies (CSR Policy) Rules, 2014
2. Annual action plan — lists specific projects, budget per project, implementing agencies (with CSR Registration Numbers), timelines and monitoring milestones; requires Board approval by resolution
3. Monitoring report — periodic (at minimum annual, ideally quarterly) review of actual spend versus plan, presented to the Board

A generic Board resolution approving "CSR spend of Rs. X for the year" does not satisfy the annual action plan requirement. Each project must be individually named and budgeted.

CSR-1 Registration: How to Vet Your Implementing Agency

Rule 4 of the Companies (CSR Policy) Rules, 2014 mandates that all implementing entities — other than the company itself and notified Central Government bodies — must register on the MCA portal using Form CSR-1 before receiving CSR funds. Each registered entity is assigned a unique CSR Registration Number (CRN).

Who must be CSR-1 registered

• Section 8 companies (not-for-profit companies under the Companies Act 2013)
• Registered public trusts with at least a three-year operational track record
• Registered societies with at least a three-year operational track record
• Entities established under any Act of Parliament or a State Legislature

Central Government bodies such as UNICEF India and national schemes administered directly by ministries are exempt from CSR-1 registration.

How to verify registration independently on MCA V3

1. Go to mca.gov.in and switch to the MCA V3 interface
2. Navigate to: MCA Services → CSR → Search CSR-1 Registered Entities
3. Enter the CRN or the agency's name
4. Confirm the registration status is Active — not lapsed, not suspended

Never accept a CRN self-reported by the implementing agency as proof of registration. Check it yourself on MCA V3 before issuing the first payment. An expired CRN is one of the top findings in MCA inspections of CSR-heavy companies.

Beyond the CRN, also check:

• Audited financials for the last three years (the agency should share these proactively)
• References from at least two other corporate funders
• Board composition and governance track record

Build these checks into your implementing agency onboarding checklist. Formalise the relationship with an MoU specifying milestones, periodic utilisation certificates, audit rights and a clawback clause in the event of misuse of funds.

Form CSR-2: Your Annual Disclosure on MCA V3

Form CSR-2 is the statutory annual CSR disclosure that every covered company must file with the Ministry of Corporate Affairs through the MCA V3 portal. It is a standalone form, separate from — but linked to — your annual financial statements filed in AOC-4.

What CSR-2 captures

• Whether a CSR Committee was constituted or the Board discharged committee functions
• The 2% obligation amount and how it was computed
• A project-wise schedule of actual CSR expenditure, including the implementing agency's CRN for each project
• Treatment of unspent amounts — which account and which fund
• Whether impact assessment was conducted, and if so, by which agency

Step-by-step filing process on MCA V3

1. Log in to MCA V3 with the authorised Director's DIN credentials
2. Navigate to: e-Filing → Company Forms → CSR-2
3. Pre-fill Company Identification Number (CIN); the portal auto-populates registered name, address and incorporation date
4. Select the financial year (FY 2026-27)
5. Enter Section 198 net profit data for the three base years and the computed obligation
6. Complete the project-wise expenditure schedule — one row per project, with CRN, amount, and whether the project is ongoing or completed
7. Upload the Board resolution approving the annual action plan, and the impact assessment report if applicable
8. Digitally sign using the Director's Class III DSC
9. Submit and save the SRN (Service Request Number) for your records

On due dates: MCA has historically extended CSR-2 deadlines and has used different due dates in different years. Monitor the official MCA V3 portal and MCA circular notifications after 31 March each year. Do not assume the extension granted in the previous year will repeat.

Unspent CSR Funds: The Two-Track Rule

How you handle unspent CSR funds depends on whether the shortfall relates to an ongoing project or a general spending gap.

Track 1 — Ongoing multi-year projects

An "ongoing project" is a Board-approved multi-year project expected to span beyond one financial year (up to a maximum of three years). If allocated funds remain unspent at year-end:

• Transfer to a designated Unspent Corporate Social Responsibility Account (a separate bank account, not the general current account) within 30 days of financial year end → by 30 April 2027 for FY 2026-27
• The transferred amount must be spent on the same project within three years from the date of transfer
• After three years, any remaining balance must move to a Schedule VII fund

Track 2 — General spend shortfalls

If the company simply falls short of its 2% obligation and the gap is not attributable to an ongoing project:

• Transfer the unspent amount to a Schedule VII fund (PM CARES Fund, PM National Relief Fund, Clean Ganga Fund, etc.) within six months of financial year end → by 30 September 2027 for FY 2026-27

Worked penalty example

ABC Pharma spends Rs. 32 lakh against its Rs. 40 lakh obligation. The Rs. 8 lakh shortfall is not an ongoing project. The company must transfer Rs. 8 lakh to a Schedule VII fund by 30 September 2027.

If it defaults on this transfer, the penalty exposure under Section 135(7) is:

• Company: lesser of (2 × Rs. 8 lakh = Rs. 16 lakh) or Rs. 1 crore → Rs. 16 lakh
• Each officer in default: lesser of (Rs. 8 lakh ÷ 10 = Rs. 80,000) or Rs. 2 lakh → Rs. 80,000 per officer

If three directors are named as officers in default, total exposure across the company and officers is Rs. 16 lakh + Rs. 2.40 lakh = Rs. 18.40 lakh — on an Rs. 8 lakh shortfall. Compliance is invariably the cheaper option.

Impact Assessment: When It Is Mandatory and What It Requires

Rule 9(3) of the Companies (CSR Policy) Rules, 2014 (as amended in 2021) mandates impact assessment for companies whose CSR obligation equals or exceeds Rs. 10 crore in any of the three preceding financial years, for every CSR project with an outlay of Rs. 1 crore or more that was completed at least one year before the assessment is commissioned.

The assessment must be conducted by an independent agency — not an entity connected to the implementing partner or to the company itself.

The cost of impact assessment is treated as CSR expenditure but is capped at the lesser of 5% of total CSR expenditure for the financial year or Rs. 50 lakh.

A credible impact assessment should:

1. Document baseline conditions before the intervention with verifiable data
2. Define measurable outcome indicators — not activity counts, but outcomes (e.g., proportion of students achieving grade-level literacy, reduction in stunting in target villages)
3. Use multiple data sources: household surveys, administrative records, focus group discussions
4. Present beneficiary feedback, including critical perspectives
5. Recommend design improvements for the next programme cycle

An impact report that reports only "5,000 beneficiaries reached" without outcome evidence is unlikely to satisfy MCA review or ESG rating agencies. Increasingly, listed companies are seeing their ESG scores influenced by the quality of CSR impact disclosures, not just the quantum of spend.

Common Mistakes and Pitfalls to Avoid

1. Computing 2% on book net profit instead of Section 198 net profit The two figures routinely differ because Section 198 excludes capital gains on investment sales and certain dividends, and requires add-backs of depreciation and director remuneration above specified limits. Always confirm the Section 198 figure with your statutory auditor before the Board approves the action plan.

2. Treating CSR as a fourth-quarter activity Rushing disbursements in February or March almost always results in funds going to unvetted agencies or being parked in PM CARES as a shortcut. Start the planning cycle in April. By June you should have identified projects; by September, signed MoUs; by December, the first tranche should be disbursed.

3. Failing to independently verify CSR-1 registration before each disbursement Verify on MCA V3 before every tranche, not just at onboarding. A lapsed registration at the time of disbursement will invalidate that expenditure.

4. Charging employee training programmes to CSR Skill development of your existing workforce is not a permissible Schedule VII activity. Only open-access community programmes qualify. If your HR team is routinely diverting training costs to the CSR budget, address this before your next statutory audit.

5. Breaching the 5% administrative overhead cap Maintain a dedicated CSR cost ledger. Track every rupee spent on staff, travel, events and reporting against the 5% ceiling on total CSR expenditure. Document the split clearly for the auditor.

6. Missing the April 30 deadline for Unspent CSR Account opening The 30-day window after financial year end is tight. Identify ongoing projects early, pre-designate the bank account, and calendar the transfer deadline. A late transfer triggers the penalty provision regardless of intent.

7. Approving a vague Board resolution on the annual action plan The resolution must name each project, specify its budget, identify the implementing agency by name and CRN, and set a timeline. Vague resolutions leave you exposed in inspections and make CSR-2 filing unnecessarily difficult.

8. Overlooking the website disclosure obligation The CSR policy must be displayed on the company's website under Rule 9. Many smaller compliant companies spend correctly but fail to publish the policy. This is a separate disclosure default and is flagged routinely in Secretarial Audit reports.

Key Takeaways

• Any one of three thresholds triggers Section 135: net worth ≥ Rs. 500 crore, turnover ≥ Rs. 1,000 crore, or Section 198 net profit ≥ Rs. 5 crore — based on the immediately preceding financial year's audited figures.
• Use Section 198, not P&L profit: the 2% obligation is computed on the average Section 198 net profit of the three preceding financial years; confirm this figure with your statutory auditor before fixing the annual budget.
• CSR-1 registration is a disbursement gate: verify each implementing agency's CRN independently on MCA V3 before releasing any funds; a lapsed or invalid registration will disallow the expenditure.
• Two deadlines for unspent funds: ongoing project balances go to the Unspent CSR Account by 30 April (30 days after year-end); non-ongoing shortfalls go to a Schedule VII fund by 30 September (six months after year-end) — missing either deadline exposes the company to penalties of up to twice the unspent amount.
• File CSR-2 on MCA V3 with project-level detail: include CRNs for every implementing agency, project-wise spend, and the Board-approved action plan resolution as a supporting document.
• Admin overhead is capped at 5% of total CSR spend: maintain a separate ledger and do not let staff salaries, event costs and reporting expenses erode funds meant for programme delivery.
• Plan in Q1, not Q4: starting your CSR programme cycle in April gives you three full quarters to select credible agencies, execute meaningful programmes and document outcomes — turning a compliance obligation into a governance asset.