CSR Compliance for Companies in India: Section 135 Explained (2026 Guide)

CSR Compliance for Companies in India: Section 135 Explained (2026 Guide)

You built your company from scratch, crossed a certain size, and suddenly your accountant mentions "CSR compliance." If your first reaction was "wait, do I have to donate money now, and is it optional or legal?" - you are not alone. Most growing founders hear about Corporate Social Responsibility only after their company has already crossed the threshold, and by then the clock on compliance has already started ticking.

The good news is that CSR compliance is very learnable once you understand the structure behind it. It is not a vague "be a good corporate citizen" suggestion - it is a specific legal obligation under the Companies Act, with defined thresholds, a committee requirement, a spending formula, and a filing you cannot skip. This guide breaks down everything you need to know in plain language, so you know exactly where your company stands and what to do next.

What is CSR Compliance Under Section 135

Corporate Social Responsibility, or CSR, compliance in India is governed by Section 135 of the Companies Act, 2013, along with the Companies (Corporate Social Responsibility Policy) Rules. In simple terms, it requires certain companies - once they cross prescribed size thresholds - to spend a portion of their profits on social, environmental, or community welfare activities.

Unlike in many other countries where CSR is voluntary and reputation-driven, India has made it a statutory requirement for qualifying companies. This means that if your company meets the criteria, spending on CSR is not a choice you can politely decline - it comes with a committee structure, a documented policy, approved implementation methods, and annual reporting obligations to the Registrar of Companies (ROC).

The law applies to private limited companies, public limited companies, and even the Indian subsidiaries or branches of foreign companies operating in India, as long as they meet the applicable net worth, turnover, or net profit criteria. It does not matter whether your company is listed or unlisted - what matters is whether you cross the prescribed financial thresholds during a financial year.

Why CSR Compliance Matters

Ignoring CSR obligations is not a minor lapse - it is treated as a compliance failure with real consequences for the company and its officers. Here is why founders and finance teams need to take it seriously.

First, non-compliance triggers monetary penalties on both the company and the officers in default, and these penalties can escalate the longer the non-compliance continues. Second, CSR details are disclosed in the company's Board Report and financial statements, which means investors, lenders, regulators, and even potential acquirers can see whether your company has been meeting its obligations. A pattern of non-compliance is a red flag during due diligence, fundraising, or bank loan approvals.

Third, CSR compliance has become closely tied to ESG (Environmental, Social, Governance) expectations that many large clients, government tenders, and institutional investors now look for before doing business with a company. Being CSR-compliant is increasingly a trust signal, not just a legal checkbox.

Finally, unspent CSR amounts (in most cases) cannot simply sit in your bank account indefinitely - the law requires you to transfer unspent amounts to specified funds or ongoing project accounts within defined timelines. Missing this transfer deadline is itself a separate compliance failure.

Who CSR Applies To

Section 135 applies to a company if, during the immediately preceding financial year, it meets any one of the following prescribed thresholds (verify the current exact figures with your CA, as rules are periodically updated):

• Net worth of the company crosses a prescribed amount (commonly cited around Rs 500 crore or more)
• Turnover crosses a prescribed amount (commonly cited around Rs 1,000 crore or more)
• Net profit crosses a prescribed amount (commonly cited around Rs 5 crore or more) during the financial year

If your company meets even one of these three criteria, CSR provisions get triggered for that financial year, regardless of whether you meet the other two thresholds. This is an "OR" condition, not an "AND" condition, which surprises many founders who assume all three thresholds must be crossed together.

It is also worth noting that if a company that was previously covered by CSR falls below these thresholds for three consecutive financial years, it may no longer be required to comply, subject to specific conditions in the rules. Newer or smaller companies that unexpectedly cross the profit threshold in a single strong year should not assume they are exempt - a single qualifying year is generally enough to trigger the obligation for that year.

What You Need for CSR Compliance

Before you can start spending or reporting, your company needs certain foundational pieces in place:

• A CSR Committee of the Board (for companies above the threshold, though smaller qualifying companies may have relaxed committee requirements depending on the amount to be spent)
• A Board-approved CSR Policy that outlines the areas of CSR focus, such as education, healthcare, environment, rural development, or other Schedule VII activities
• Identification of eligible CSR activities that fall within Schedule VII of the Companies Act
• A implementation mechanism - either directly, through a registered trust, society, or Section 8 company, or via an implementing agency registered with the government
• CSR-1 registration for the implementing NGO or entity, if you are routing funds through an external organisation
• Proper documentation and impact assessment for larger CSR projects, especially where the spend crosses certain thresholds
• A system to track unspent amounts, ongoing projects, and fund transfers to specified accounts where applicable

Founders often underestimate the documentation requirement - it is not enough to simply write a cheque to a charity. The activity must map to Schedule VII, the recipient organisation (if external) should ideally be CSR-1 registered, and the entire trail needs to be board-approved and disclosed.

Step-by-Step: How to Comply with CSR Requirements

1. Determine applicability - Check your net worth, turnover, and net profit for the immediately preceding financial year against the prescribed thresholds.
2. Constitute a CSR Committee - The Board must form a committee (composition requirements vary based on company size) responsible for formulating and monitoring the CSR policy.
3. Draft and approve a CSR Policy - The Board, based on the committee's recommendation, approves a policy specifying the CSR activities to be undertaken, aligned with Schedule VII.
4. Calculate the mandatory CSR spend - The company must spend at least the prescribed percentage (commonly referenced as around 2%) of its average net profit of the preceding three financial years.
5. Select implementation mode - Decide whether to run CSR activities directly, through your own foundation, or via an external NGO/trust/Section 8 company that holds valid CSR-1 registration.
6. Execute the CSR activities during the financial year, keeping proper invoices, agreements, and utilisation certificates from implementing partners.
7. Handle unspent amounts correctly - If the full amount isn't spent, and it doesn't relate to an "ongoing project," the unspent amount generally needs to be transferred to a specified fund (such as those under Schedule VII) within the prescribed timeline. If it relates to an ongoing project, it typically needs to be transferred to a separate "Unspent CSR Account."
8. Disclose CSR details in the Board Report - This includes the CSR policy, amount spent, unspent amounts, reasons for shortfall, and composition of the CSR committee.
9. File the CSR disclosure as part of annual filings - CSR details form part of the company's annual return and financial statement filings with the ROC.
10. Retain records for future audits - Keep all agreements, fund transfer proofs, and impact reports safely, since these can be scrutinised during ROC inspections or audits.

Cost, Fees and Penalties in 2026

CSR compliance costs typically include the mandatory CSR spend itself (the ~2% of average net profit), plus professional fees for drafting the CSR policy, structuring the committee, preparing disclosures, and filing annual returns correctly. These professional fees vary widely depending on company size and complexity, so always get a clear, itemised quote rather than assuming a flat number.

On the penalty side, non-compliance with CSR provisions - such as failing to spend the mandated amount without valid disclosure, or failing to transfer unspent amounts within the specified timeline - can attract monetary penalties on the company and on every officer in default. These penalties are structured under the Companies Act and can apply per instance of default, with amounts capped but still significant for repeated or prolonged non-compliance.

Because penalty structures, spend percentages, and threshold figures are periodically revised by the Ministry of Corporate Affairs, please verify the current applicable rate and threshold figures with a professional before making any compliance decision. Do not rely solely on last year's numbers.

Timeline and Due Dates for CSR Compliance

CSR compliance runs on the same broad timeline as your company's annual compliance cycle:

• CSR spend should ideally be planned and executed during the financial year itself (April to March)
• Unspent amount transfer to a specified fund (for non-ongoing project categories) is generally required within a few months after the end of the financial year - commonly referenced as within 6 months of the financial year end, but verify the current rule
• Unspent CSR Account transfers for ongoing projects usually need to happen within 30 days of the end of the financial year
• Board Report disclosure of CSR activities is filed along with the company's annual filings, typically due within the standard annual filing timeline (AOC-4 and MGT-7 deadlines)
• CSR-1 registration for implementing agencies should be completed before funds are routed to them, not after

Missing these windows even by a few days can convert a simple compliance task into a penalty-triggering default, so it helps to set internal reminders well before the financial year closes.

CSR vs Voluntary Donations: Key Distinctions

Many founders confuse mandatory CSR spending with general business donations or sponsorships. Here are the key differences:

• Legal basis: CSR spending is a statutory requirement under Section 135 for qualifying companies; voluntary donations are discretionary and not mandated by any specific section.
• Eligible activities: CSR spend must align with Schedule VII activities; voluntary donations can go to any cause the company chooses, without such restriction.
• Reporting: CSR spend must be disclosed in the Board Report with specific formats; regular donations do not require this dedicated disclosure format.
• Tax treatment: CSR expenditure is generally not allowed as a business deduction under the Income Tax Act in the same way ordinary business expenses are, whereas certain voluntary donations may qualify for deduction under sections like 80G, subject to conditions.
• Committee oversight: CSR requires a Board-level committee and policy; voluntary CSR-like spending by non-qualifying companies has no such mandatory governance structure.
• Unspent fund treatment: CSR unspent amounts have strict transfer rules; there is no equivalent rule for voluntary spending that a company chooses not to complete.

Understanding this distinction matters because some companies mistakenly assume any donation counts toward their CSR obligation, when in fact only properly structured, policy-aligned, Schedule VII-compliant spending counts.

Common Mistakes Companies Make with CSR Compliance

• Assuming CSR is optional because the company is privately held or family-run - the law applies regardless of ownership structure.
• Spending through non-CSR-1-registered NGOs, which can make the spend ineligible for CSR credit.
• Missing the "OR" condition in threshold calculation and assuming all three criteria (net worth, turnover, profit) must be met together.
• Not maintaining proper documentation - agreements, utilisation certificates, and impact reports - leaving the company exposed during audits.
• Forgetting to transfer unspent amounts within the prescribed deadline, which is treated as a separate default from the underlying spending shortfall.
• Treating CSR spend as a tax-deductible business expense without checking the specific tax treatment, leading to notices from the Income Tax Department.
• Not forming a proper CSR Committee or skipping committee meeting minutes, which weakens governance compliance even if the money was actually spent.
• Ignoring impact assessment requirements for larger projects where an independent impact assessment may be mandated.

Frequently Asked Questions

Does CSR apply to private limited companies too?

Yes. Section 135 applies to any company - private limited, public limited, or a foreign company's Indian operations - as long as it crosses the prescribed net worth, turnover, or net profit threshold in the preceding financial year. Company type does not create an exemption.

What happens if my company does not spend the full CSR amount?

If the shortfall relates to an ongoing project, the unspent amount must be transferred to a separate Unspent CSR Account within the prescribed timeline and spent within the project's timeline. If it does not relate to an ongoing project, the unspent amount generally must be transferred to a specified fund. Failure to do either can attract penalties.

Can I use my CSR budget to fund my own company's marketing or branding?

No. CSR funds cannot be used for activities that primarily benefit the company itself, such as marketing, branding, or activities undertaken purely in the normal course of business, except in very limited, government-notified exceptions.

Is CSR spending tax-deductible under the Income Tax Act?

Generally, CSR expenditure is not treated as a deductible business expense under the Income Tax Act, though specific donations made under CSR that separately qualify under sections like 80G may get some tax benefit, subject to conditions. Always verify current tax treatment with a CA before assuming deductibility.

Do I need to register my NGO partner before giving them CSR funds?

Yes, since a notified date, entities implementing CSR projects on behalf of companies are required to register with the government using Form CSR-1 and obtain a CSR Registration Number, which the funding company should verify before transferring funds.

How is the CSR spending percentage calculated?

It is commonly calculated as a percentage (referenced around 2%) of the company's average net profit computed as per Section 198, over the three immediately preceding financial years. Please verify the exact computation method and percentage applicable currently with a professional.

What are the penalties if my company simply ignores CSR obligations?

Penalties can apply to both the company and every officer in default, structured as monetary fines under the Companies Act, and these can increase for continuing defaults. Since the exact penalty amounts are subject to periodic revision, verify the current rate before assuming a fixed figure.

Can a newly incorporated company be covered under CSR in its very first year?

Generally, CSR applicability is checked based on the immediately preceding financial year's financials, so a brand-new company usually would not have a "preceding year" to test against. However, once the company completes a financial year and crosses the threshold, CSR obligations can apply from the following year onward.

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