CORPORATE SOCIAL RESPONSIBILITY

CORPORATE SOCIAL RESPONSIBILITY UNDER SECTION 135: A COMPLETE COMPLIANCE GUIDE FOR FY 2026-27

Corporate Social Responsibility (CSR) in India is not voluntary giving — it is a statutory spend obligation with a penalty regime attached. Section 135 of the Companies Act, 2013, read with the Companies (CSR Policy) Rules, 2014 and subsequent MCA notifications, requires eligible companies to spend at least 2% of their average net profits on Schedule VII activities every financial year. Since FY 2020-21, failure to comply attracts direct monetary penalties, not merely disclosure requirements. Here is what your company needs to know and do for FY 2026-27.

Who Must Comply: Section 135 Applicability Thresholds

Every company — public, private, or One Person Company (OPC) — that meets any one of the following thresholds in the immediately preceding financial year is caught by Section 135:

• Net worth of ₹500 crore or more, or
• Turnover of ₹1,000 crore or more, or
• Net profit of ₹5 crore or more (as computed under Section 198)

The "or" is critical. A company with modest net worth but turnover exceeding ₹1,000 crore is fully liable. Conversely, a company with turnover well below ₹1,000 crore but net profit above ₹5 crore is equally obligated.

When Does the Obligation End?

Once triggered, the obligation does not automatically cease the moment you fall below a threshold. Under the Companies (Amendment) Act, 2020, a company is exempt only after falling below all three thresholds in three consecutive financial years. If your net profit drops below ₹5 crore in FY 2026-27 but your turnover remains above ₹1,000 crore, you remain fully liable. Mark the three-year clock carefully.

Foreign Companies and Section 8 Companies

Foreign companies having a branch or project office in India are covered if they meet the thresholds. Section 8 companies (not-for-profit entities registered under the Companies Act) can serve as implementing agencies for other companies' CSR projects — they are not inherently exempt from the obligation if they themselves meet the thresholds, though in practice most Section 8 companies do not generate the profit levels required.

How CSR Spend is Calculated: The Section 198 Net Profit Method

The minimum CSR spend is 2% of the average net profits of the company for the three immediately preceding financial years. For FY 2026-27 obligations, the reference years are FY 2023-24, FY 2024-25, and FY 2025-26.

Section 198 Net Profit — Not Your P&L Bottom Line

"Net profit" for CSR purposes is computed under Section 198 of the Companies Act, which differs from your audited profit after tax. Key adjustments:

• Add back: depreciation under the Act (not the Schedule II rate necessarily), managerial remuneration actually charged, losses of subsidiary companies, donations, and certain provisions
• Exclude: capital profits on asset sales (not related to business), profits from forfeiture of shares, income from investments in subsidiaries, and profits of a capital nature not arising from business

Section 198 profit is broadly a normalised operating profit figure. Your statutory auditor computes this for the Board's report. Do not use book profit for MAT, accounting profit, or distributable profit interchangeably — they will give you the wrong CSR obligation.

Companies Not Completing Three Years

A company that completed its first financial year in FY 2025-26 has only one preceding year of Section 198 profit available. It uses that single year's profit. A company completing its second year uses the average of two years. This distinction matters for newer entities crossing thresholds for the first time.

Worked Example: Computing CSR Obligation for FY 2026-27

Scenario: Prism Manufacturing Pvt. Ltd., a mid-sized auto-ancillary company.

Minimum CSR obligation for FY 2026-27 = 2% × ₹22.60 crore = ₹45.20 lakh

During FY 2026-27, Prism undertakes two projects:

• Project A (Ongoing — 3-year school infrastructure project): ₹30 lakh disbursed in FY 2026-27
• Project B (Non-ongoing — health camp for village clusters): ₹10 lakh disbursed and completed

Total spent: ₹40 lakh. Shortfall: ₹5.20 lakh.

The ₹5.20 lakh shortfall is allocated as follows:

• ₹3 lakh relates to Project A (ongoing) → must be transferred to the Unspent CSR Account within 30 days of 31 March 2027, i.e., by 30 April 2027
• ₹2.20 lakh is unallocated to any ongoing project → must be transferred to a Schedule VII fund (e.g., PM National Relief Fund or PM CARES Fund) within six months of 31 March 2027, i.e., by 30 September 2027

Penalty exposure if Prism does nothing:

• On the company: 2 × ₹5.20 lakh = ₹10.40 lakh (well below ₹1 crore cap) → ₹10.40 lakh
• On each defaulting officer: 1/10 × ₹5.20 lakh = ₹52,000 (below ₹2 lakh cap) → ₹52,000 per officer

These are civil penalties imposed by the Registrar of Companies (RoC) — no adjudication is required for amounts below certain thresholds, making timely compliance cheaper than the penalty route by a wide margin.

Permissible Activities: Schedule VII in Detail

CSR spend must map to one or more of the activities listed in Schedule VII of the Companies Act, 2013. The Schedule is broader than most finance teams assume. It currently covers:

1. Eradicating hunger, poverty and malnutrition; promoting health care including preventive health care and sanitation; making available safe drinking water
2. Promoting education including special education and employment-enhancing vocational skills, especially among children, women, elderly, and differently abled persons
3. Promoting gender equality; empowering women; setting up homes and hostels for women and orphans; old age homes, day care centres
4. Ensuring environmental sustainability; ecological balance; conservation of natural resources; maintaining quality of soil, air, and water; climate change, if prescribed by the Board
5. Protection of national heritage, art, and culture including restoration of buildings and sites of historical importance and works of art
6. Measures for the benefit of armed forces veterans, war widows and their dependents; Central Armed Police Forces and their families
7. Training to promote rural sports, nationally recognised sports, Paralympic sports, and Olympic sports
8. Contribution to PM National Relief Fund (PMNRF), PM CARES Fund, and any other fund set up by the Central Government for socio-economic development and relief, or for the welfare of Scheduled Castes, Scheduled Tribes, other backward classes, minorities, and women
9. Contributions to incubators or research and development projects funded or aided by the Central Government or State Governments or Public Sector Undertakings or central or state government-funded universities or IITs
10. Rural development projects; slum area development; disaster management including relief, rehabilitation, and reconstruction activities
11. Training for promotion of sports (distinct from Schedule VII item 7; covers broader sports promotion)

What Does Not Qualify

Contributions to political parties, activities benefiting only the company's own employees, sponsorship of events for commercial benefit, and ordinary business expenses dressed as CSR do not count. MCA circular clarifications have also confirmed that COVID-related expenditure on employee welfare (beyond statutory obligation) and plain donations to unregistered entities are non-compliant.

Constituting the CSR Committee: Composition and Mandate

Every company subject to Section 135 must constitute a Board-level CSR Committee. The composition rules are:

• Three or more directors, of whom at least one must be an independent director
• For companies not required to appoint an independent director (e.g., private companies below the threshold), a CSR Committee of two directors is sufficient — no independent director required

What the CSR Committee Must Do

The CSR Committee's statutory functions include:

1. Formulating and recommending the CSR Policy to the Board (including the list of projects and the implementation modality)
2. Recommending the amount of expenditure to be incurred
3. Monitoring the CSR Policy from time to time and reporting to the Board
4. Preparing the annual CSR report for inclusion in the Board's report

The Board must approve the CSR Policy and disclose it on the company's website. Changes to the policy mid-year are permissible but must be board-approved and website-updated before spending under the revised policy begins.

Treating Unspent CSR: The 30-Day and Six-Month Rules

This is the single most misunderstood area of CSR compliance. Since FY 2020-21, "comply or explain" is dead. If you do not spend the full 2%, there is a mandatory fund transfer obligation depending on project status.

Rule 1 — Unspent Amount Relating to an Ongoing Project

Transfer to a dedicated Unspent CSR Account in a scheduled commercial bank within 30 days of the end of the financial year.

For FY 2026-27: transfer deadline is 30 April 2027.

The company must utilise this amount within three financial years from the date of transfer. If unutilised after three years, it must be transferred to one of the Schedule VII funds specified in MCA rules. The Unspent CSR Account must be a separate account — it cannot be a sub-ledger of the general current account.

Rule 2 — Unspent Amount Not Relating to Any Ongoing Project

Transfer directly to a Schedule VII fund (PM National Relief Fund, PM CARES Fund, or any other Central Government-notified fund) within six months of the end of the financial year.

For FY 2026-27: transfer deadline is 30 September 2027.

There is no intermediate holding account option here. Transfer directly from company accounts to the government fund.

Practical Checkpoint Before Year-End

In February/March of each year, the CFO and CSR Committee should reconcile:

• Total CSR obligation for the year
• Amounts actually disbursed project-by-project
• Projected shortfall and its categorisation (ongoing vs. non-ongoing)
• Banking arrangements for the Unspent CSR Account if needed

Rushing this in April after the books close is how companies miss the 30-day window.

Implementing Partners, Form CSR-1, and Impact Assessment

Form CSR-1 Registration — Mandatory for Implementing Agencies

If your company routes CSR funds through an external implementing agency — an NGO, trust, society, or Section 8 company — that agency must be registered on the MCA portal using Form CSR-1. Funds transferred to an unregistered implementing agency are treated as non-compliant CSR spend. No registration number from the agency means the spend does not count.

How to verify: Ask the implementing partner for their unique CSR-1 registration number. Cross-check on the MCA V3 portal (mca.gov.in) under the CSR-1 search functionality before transferring any funds.

Companies are also permitted to implement CSR projects directly (without any external partner), or through a company established under Section 8 that is set up by the company itself.

Impact Assessment — Mandatory Above ₹1 Crore

For projects with a budgeted CSR outlay of ₹1 crore or more per project, an independent third-party impact assessment is mandatory if the project has been running for at least one year. The impact assessment report must be:

• Filed with Form CSR-2 for the relevant financial year
• Disclosed on the company's website
• Placed before the Board

The cost of impact assessment can itself be charged to the CSR budget — subject to a cap of 5% of total CSR expenditure for that year or ₹50 lakh, whichever is less.

Annual Reporting: Form CSR-2 and the Board's Report

Form CSR-2 on MCA V3

Form CSR-2 is filed as a standalone annual return on the MCA V3 portal (mca.gov.in). It is not an attachment to any other form — it is a separate e-form with its own SRN (Service Request Number). Filing is due within 60 days of the date of filing of Form MGT-7 or MGT-7A (the annual return). For most companies, this means CSR-2 is due by November 2027 for FY 2026-27, depending on the AGM date.

CSR-2 captures:

• CSR Committee composition
• Details of all CSR projects, amounts approved, and amounts disbursed
• Total unspent amount and the account/fund to which it was transferred
• Third-party impact assessment details (if applicable)
• Web-link to the CSR policy and annual impact reports

Board's Report Disclosure

Under Rule 8 of the CSR Rules, 2014, the Board's report must include a CSR Annual Report as an annexure. This must contain:

• Brief outline of the CSR policy and projects
• Web-link to the CSR policy
• Composition of the CSR Committee and number of meetings held
• Amount required to be spent vs. amount actually spent
• Reasons for not spending the full amount (if applicable)
• Statement that the CSR policy is available on the company website

Both the CSR Committee chairperson and the CEO/MD must sign the CSR annual report.

Common Mistakes That Trigger MCA Scrutiny

1. Using Section 198 profit incorrectly. Companies routinely use PAT (profit after tax from the P&L) instead of Section 198 net profit, understating their CSR obligation. If Section 198 profit is higher than PAT (common when there are capital profits or subsidiary losses added back), the company underspends without realising it.

2. Routing funds to an unregistered implementing agency. No CSR-1 registration number = non-compliant spend. Verify before every transfer, as registrations can lapse.

3. Missing the 30-day Unspent CSR Account deadline. The 30 April deadline for FY 2026-27 is absolute. Companies that open the Unspent CSR Account in May or June are already in default. The account must be opened and funded by 30 April.

4. Treating administrative overheads as CSR spend without a cap. Administrative overhead (salaries of CSR staff, travel, monitoring costs) can only be charged to CSR up to a ceiling of 5% of total CSR expenditure for the year. Anything above this ceiling is not qualifying spend.

5. Spending on employee welfare and calling it CSR. Facilities provided exclusively to employees — medical camps on factory premises, cafeteria improvements, employee housing — are not CSR. Schedule VII activities must benefit the community or specified beneficiaries, not employees whose welfare is already a statutory obligation.

6. No board approval for the CSR project list before spending. Expenditure must follow a board-approved CSR policy and project list. Spending on a good cause without prior board resolution is non-compliant, regardless of how worthy the activity is.

7. Website non-disclosure. MCA scrutiny now includes checking company websites for CSR policy and impact report disclosures. Non-disclosure is independently penalisable as a violation of Rule 9 of the CSR Rules.

Penalty Framework for Non-Compliance

The Companies (Amendment) Act, 2019, inserted Section 135(7), converting CSR into a penalty-bearing obligation from FY 2020-21 onwards. The penalty structure is:

Worked penalty calculation — Prism Manufacturing (from earlier example):

Total unspent and not transferred: ₹5.20 lakh

• Company penalty: 2 × ₹5.20 lakh = ₹10.40 lakh (cap is ₹1 crore; ₹10.40 lakh applies)
• Officer penalty (CFO and Company Secretary both defaulting): ₹52,000 each (cap is ₹2 lakh; ₹52,000 applies)

Adjudication route: Penalties under Section 135(7) are adjudicated by the Registrar of Companies under Section 454. The adjudication order is appealable before the Regional Director (RD) within 60 days. Continued default after an adjudication order attracts a further penalty of ₹1,000 per day of default (subject to maximum limits).

Impact assessment default: Failing to commission the mandatory third-party impact assessment for qualifying projects is also a violation of Rule 8(3A) of the CSR Rules, attracting penalty under Section 450 (general penalty for contravention of Act provisions not specifically penalised elsewhere) — currently ₹10,000 and ₹1,000 per day of continuing default.

The practical message: the cost of compliance (opening a bank account, writing a cheque to PM CARES, getting an impact assessment done) is always lower than the penalty. There is no situation where non-compliance is economically rational.

CSR as a Strategic Asset, Not Just a Compliance Line Item

The shift from comply-or-explain to comply-or-pay has had an unintended benefit: companies now plan CSR as seriously as any capital expenditure. The most effective CSR programmes share three characteristics:

Alignment with business geography or workforce. A cement company investing in village infrastructure near its plant gets maximum community goodwill and employee engagement simultaneously. The Schedule VII activity (rural development) maps cleanly, and the impact is measurable.

Multi-year ongoing projects over annual one-time spends. A three-year school construction project with defined milestones generates better impact data, qualifies for the Unspent CSR Account mechanism when needed, and builds a relationship with the implementing partner that reduces programme leakage.

Measurable outcomes from year one. Even for projects below the ₹1 crore impact assessment threshold, companies that set baselines — number of students enrolled, tonnes of waste processed, number of beneficiaries provided healthcare — are better positioned for ESG disclosures and BRSR (Business Responsibility and Sustainability Reporting) requirements that are already mandatory for the top 1,000 listed companies and expanding.

Key Takeaways

• Section 135 catches any company meeting at least one of three thresholds — net worth ≥ ₹500 crore, turnover ≥ ₹1,000 crore, or net profit ≥ ₹5 crore — in the preceding financial year; once triggered, the obligation continues until all three thresholds are missed for three consecutive years.
• Your CSR number is 2% of Section 198 net profit (averaged over the preceding three financial years), not 2% of PAT — use the right computation or risk under-spending.
• Unspent CSR for ongoing projects must go into a dedicated Unspent CSR Account by 30 April 2027; unspent amounts not tied to ongoing projects must reach a Schedule VII government fund by 30 September 2027 — both deadlines are hard cutoffs.
• Every external implementing agency must hold a valid Form CSR-1 registration on the MCA V3 portal; spending through an unregistered partner is non-compliant irrespective of the merit of the activity.
• Projects with CSR outlay of ₹1 crore or more (per project, running for at least one year) require a mandatory independent third-party impact assessment, the cost of which can be charged to the CSR budget up to specified limits.
• Administrative overhead charged to CSR is capped at 5% of total CSR expenditure for the year — anything above that is not qualifying spend.
• Penalties for failing to transfer unspent amounts are capped at twice the unspent amount (or ₹1 crore, whichever is less) for the company, and one-tenth of the unspent amount (or ₹2 lakh, whichever is less) per defaulting officer — the penalty is always more expensive than compliance, so act before year-end, not after.