CSR Applicability and Compliance Under Section 135: 2026 Guide

CSR Applicability and Compliance Under Section 135: 2026 Guide

Corporate Social Responsibility in India is not a voluntary gesture for many companies — it is a statutory obligation under Section 135 of the Companies Act, 2013, backed by specific spending mandates, committee requirements, and filing obligations. Once a company crosses the prescribed financial thresholds, CSR shifts from being a discretionary initiative to a compliance requirement with real financial and reporting consequences for getting it wrong.

This guide walks through exactly which companies must comply, how the mandatory 2% spend is calculated, what the CSR committee must do, the forms involved (including CSR-1 and CSR-2), and how unspent CSR amounts must be handled under current rules.

What is CSR Under Section 135

Section 135 of the Companies Act, 2013, along with the Companies (Corporate Social Responsibility Policy) Rules, requires certain companies to spend a portion of their profits on social, environmental, and community welfare activities that fall within the categories specified in Schedule VII of the Act — covering areas such as education, healthcare, poverty eradication, environmental sustainability, rural development, gender equality, and disaster relief, among others.

Unlike voluntary corporate philanthropy, CSR under Section 135 comes with a defined applicability test, a prescribed spending formula, a governance structure (the CSR Committee), and mandatory disclosure in the company's board report and specific ROC filings.

Applicability Thresholds

A company (including its holding or subsidiary companies, and foreign companies with a branch or project office in India meeting the criteria) is required to comply with CSR provisions if, during the immediately preceding financial year, it meets any one of the following thresholds:

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

These figures have remained the benchmark thresholds under the Act for several years, but companies should always verify the currently notified figures before concluding applicability, since threshold revisions, though infrequent, do happen. It is important to note that the test is based on the preceding financial year's figures — so a company that crossed the threshold last year is bound by CSR obligations in the current year, even if its profits or turnover dip below the threshold in the current year itself.

Once a company becomes subject to CSR obligations, it generally remains so until it stops meeting any of the three thresholds for three consecutive financial years, at which point the CSR committee and spending obligation are no longer mandatory (though many companies choose to continue CSR activity voluntarily for reputational and stakeholder reasons).

The 2% Spend Rule

A company meeting the applicability criteria must spend, in every financial year, at least 2% of its average net profit made during the three immediately preceding financial years, calculated in accordance with Section 198 of the Act (which prescribes how "net profit" is computed for CSR purposes, distinct from net profit as per the profit and loss account).

For companies that have not completed three financial years since incorporation, the average is computed over the shorter period the company has been in existence.

Key points to keep in mind on the spend calculation:

• The 2% figure is a floor, not a ceiling — companies are free to spend more, and many do, particularly larger corporates with established CSR foundations.
• Administrative overheads for managing CSR programs are capped (commonly around 5% of total CSR expenditure for the year) to ensure the bulk of the mandated spend reaches actual beneficiaries rather than internal administration.
• Impact assessment costs, where applicable to larger CSR projects, are also subject to a prescribed cap as a percentage of that year's CSR spend.
• Contribution to certain funds (such as specified relief funds) and eligible activities under Schedule VII both count toward fulfilling the 2% obligation, but only if they meet the conditions prescribed under the CSR Rules.

The CSR Committee

Every company that meets the applicability threshold must constitute a CSR Committee of the Board, consisting of at least three directors, of which at least one must be an independent director. Where the company is not required to appoint an independent director under other provisions of the Act, the committee can be constituted without one, but this exception is narrow and should be checked carefully against the company's specific facts.

For private companies with only two directors on the board, and for companies falling under specified relaxed categories, the CSR Committee can consist of just two directors, without the independent director requirement.

Responsibilities of the CSR Committee:

1. Formulate and recommend to the board a CSR Policy indicating the activities the company proposes to undertake in the areas specified in Schedule VII
2. Recommend the amount of expenditure to be incurred on CSR activities for the year
3. Monitor the CSR Policy from time to time and ensure the activities are being carried out as approved
4. Formulate and recommend an annual action plan, consistent with the CSR Policy, covering the list of projects, timelines, budget allocation, and modalities for utilisation and monitoring of funds

The board of the company, based on the committee's recommendations, approves the CSR Policy, ensures its implementation, and discloses the contents of the policy and the CSR activities undertaken in the board's report and on the company's website.

Step-by-Step CSR Compliance Process

1. Determine applicability by checking net worth, turnover, and net profit against the thresholds for the immediately preceding financial year.
2. Constitute the CSR Committee, if not already in place, and formally record its composition through a board resolution.
3. Formulate the CSR Policy and annual action plan, identifying eligible Schedule VII activities aligned with the company's capabilities and the communities or causes it intends to support.
4. Calculate the mandatory 2% spend based on average net profit of the preceding three financial years, computed under Section 198.
5. Decide the implementation mode — CSR activities can be carried out directly by the company, or through an implementing agency such as a registered trust, society, or Section 8 company, provided that agency has filed Form CSR-1 with the Registrar.
6. Execute the approved CSR activities and projects through the financial year, keeping detailed records of expenditure against each project.
7. Undertake impact assessment, where applicable — generally required for companies with a specified minimum average CSR obligation and project outlay, using an independent agency.
8. Report CSR activities in the board's report, following the prescribed annexure format, including details of the CSR Policy, amount spent, unspent amounts (if any), and reasons for shortfall, if applicable.
9. File Form CSR-2 with the Registrar, as a separate return specifically reporting CSR details for the financial year, in addition to disclosure in the board's report.

Forms and Documents Required

• CSR Policy document, approved by the board and disclosed on the company's website
• Board resolution constituting the CSR Committee and approving the CSR Policy and annual action plan
• Form CSR-1 — filed by any entity (trust, society, or Section 8 company) that wishes to act as an implementing agency for CSR projects on behalf of companies; this registration is a precondition for receiving CSR funds from companies
• Form CSR-2 — a report on CSR filed by the company itself, containing details of applicability, spend, and compliance for the financial year, filed as an addendum to the financial statements
• Annual Report annexure on CSR, disclosing composition of the committee, CSR policy summary, amount spent versus required, and details of any unspent amount and its transfer
• Impact assessment report, where applicable, prepared by an independent agency for larger CSR projects

Fees Involved (2026, Indicative)

• CSR-1 filing (for implementing agencies): government filing fee is generally modest and fixed, though professional fees for drafting the trust/society documentation and completing the registration vary by provider.
• CSR-2 filing (for companies): typically no separate heavy government fee beyond standard filing charges, but professional fees for compiling the CSR report and reconciling spend data can vary based on the complexity of the company's CSR program.
• Impact assessment costs, where mandated, are usually a meaningful line item and are themselves capped as a percentage of the year's CSR spend, but the absolute amount depends on project scale.
• CSR program administration and execution costs are, of course, the largest component and depend entirely on the scope and ambition of the company's chosen CSR activities.

Because CSR-related fee caps and thresholds are reviewed periodically by the Ministry of Corporate Affairs, always confirm current figures before finalising a year's CSR budget.

Due Dates and Timeline

• CSR-1 registration for an implementing agency should be completed before it starts receiving CSR contributions from companies — there is no fixed calendar date, but it must precede fund transfer.
• Annual CSR spend must generally be incurred within the financial year to which it relates (April to March), though provisions exist for carrying forward unspent amounts under specific circumstances described below.
• CSR-2 filing is typically due after the company's financial statements and annual return filings for the year are finalised, as it is filed as an addendum referencing those figures — the exact due date is notified separately each year and should be checked against the current MCA circular.
• Board report disclosure on CSR follows the same timeline as the company's overall annual filing cycle, tied to the AGM and subsequent ROC filings.

Unspent Amount Rules

If a company is unable to spend the full mandated CSR amount in a given financial year, the treatment depends on whether the unspent amount relates to an ongoing project or not:

• Unspent amount not related to an ongoing project: must be transferred to a fund specified in Schedule VII (such as the PM CARES Fund or a similar notified fund) within a short prescribed period (commonly cited as within six months) from the end of the financial year.
• Unspent amount related to an ongoing project: must be transferred to a special "Unspent CSR Account" opened by the company within a prescribed period (commonly cited as within 30 days) from the end of the financial year, and must then be spent on that ongoing project within three financial years from the date of transfer. Any amount remaining unspent even after three years must then be transferred to a Schedule VII fund.

Companies must maintain clear documentation distinguishing "ongoing" from "non-ongoing" CSR commitments, since the compliance pathway and deadlines differ materially between the two.

Penalties and Common Pitfalls

• Penalty for non-compliance: the company can be liable to a penalty (often described as twice the unspent amount or a specified fixed sum, whichever is lower), and every officer in default can face a separate penalty, subject to a prescribed cap.
• Failure to transfer unspent amounts within the prescribed timelines is one of the most common and costly compliance failures, since it is easy to overlook the distinction between ongoing and non-ongoing project treatment.
• Engaging an implementing agency without valid CSR-1 registration renders the arrangement non-compliant, and funds routed through an unregistered agency may not count toward the company's CSR obligation.
• Inadequate board report disclosure — omitting required details such as composition of the CSR committee, reasons for any shortfall, or the CSR policy link — is a frequent finding in ROC scrutiny.
• Miscalculating average net profit under Section 198 rather than using the profit and loss account figure directly is a subtle but consequential error that affects the entire spend calculation.
• Treating CSR as optional once thresholds are crossed — some companies wrongly assume a one-off bad year exempts them; in fact, the obligation continues until the company fails to meet any threshold for three consecutive years.

FAQ

Does a private company have to comply with CSR provisions?

Yes, if it meets any one of the applicability thresholds (net worth, turnover, or net profit) in the preceding financial year, a private company is equally bound by Section 135, regardless of whether it is closely held or has external investors.

What counts as an eligible CSR activity?

Only activities falling within the categories listed in Schedule VII of the Companies Act — such as education, healthcare, environmental sustainability, poverty alleviation, and rural development — qualify. Activities undertaken in the normal course of business, or benefiting only the company's own employees, are generally excluded.

Can CSR funds be spent through an NGO?

Yes, but only through an implementing agency (trust, society, or Section 8 company) that has registered with the Registrar by filing Form CSR-1. Contributions to unregistered entities generally do not count toward the company's CSR obligation.

What happens if a company spends more than 2% in one year?

The excess amount can, subject to specified conditions, be set off against the CSR obligation of the immediately succeeding financial years, providing some flexibility for companies that front-load larger projects.

Is CSR spend tax-deductible?

Generally, CSR expenditure is not allowed as a deduction for computing taxable business income, though specific contributions eligible under other provisions (such as certain notified funds) may separately qualify for deduction under those distinct provisions. This is a nuanced area and should be checked with a tax advisor for the specific expenditure category.

What is the difference between CSR-1 and CSR-2?

CSR-1 is filed by an entity seeking registration as an eligible implementing agency to receive and utilise CSR funds on behalf of companies. CSR-2 is filed by the company itself, reporting its CSR applicability, spend, and compliance details for the financial year.

Does CSR applicability stop immediately once a company falls below the thresholds?

No. The obligation continues until the company fails to meet any of the three thresholds for three consecutive financial years, after which the CSR Committee and mandatory spend requirement cease to apply.

Is impact assessment mandatory for all CSR projects?

No, impact assessment is generally required only for companies with a CSR obligation and project outlay above specified thresholds, and typically applies to larger, longer-duration projects rather than smaller initiatives.

Why Founders Choose Legal Suvidha

For 14 years we have taken founders end-to-end — from choosing the right structure and incorporating, to first-year compliance, funding readiness, and ongoing ROC/GST/tax filings — so you never have to switch providers as you grow.

• One team for the whole journey — start, launch, post-launch and every annual filing after.
• Fixed, all-inclusive pricing — professional plus government fees itemised, no hidden charges.
• A dedicated CA/CS who owns your case and does not disappear after payment.
• 6,000+ founders served, 4.9/5 rating, DPIIT-recognised, 100% online.

Talk to a Legal Suvidha expert today for a free consultation and an exact, transparent quote on WhatsApp (8130645164).