By Saurav Mehra Corporate Social Responsibility in India is not a voluntary gesture. For companies that cross specific financial thresholds, it is a legal obligation enforced under the Companies Act, 2013. Section 135 is the provision that makes this mandatory, and non-compliance carries real consequences.
Understanding Section 135 is essential for company directors, CFOs, compliance officers, and even investors evaluating governance quality.
The Legal Foundation
Section 135 of the Companies Act, 2013, read with the CSR Rules 2014 (amended significantly in 2021), creates a structured framework requiring qualifying companies to spend a defined portion of their profits on socially beneficial activities.
India became one of the first countries in the world to legally mandate corporate CSR spending, making this framework globally significant.
Which Companies Must Comply
Not every company falls under Section 135. The provision applies to any company — Indian or foreign operating in India — that meets any one of the following criteria in the immediately preceding financial year:
- Net worth of ₹500 crore or more
- Turnover of ₹1,000 crore or more
- Net profit of ₹5 crore or more
Once a company crosses even one threshold, it must constitute a CSR Committee, formulate a CSR policy, and spend the mandated amount.
How Much Must Be Spent
The mandatory CSR spend is at least 2% of the average net profits of the company during the three immediately preceding financial years.
Net profit for this calculation is defined as profit before tax, computed under Section 198 of the Companies Act, excluding certain items like capital gains from asset sales.
If a company is newly incorporated and has not completed three years, the average is calculated over the years it has operated.
The CSR Committee
Every qualifying company must constitute a CSR Committee at the board level. The committee must have:
- Minimum three directors, including at least one independent director
- For private companies or small companies, the requirement is two directors
The committee’s responsibilities include:
- Formulating and recommending the CSR policy to the board
- Recommending the amount to be spent
- Monitoring CSR activities and outcomes
- Approving CSR projects and implementing agencies
Eligible CSR Activities
Section 135 and Schedule VII of the Companies Act define the activities that qualify as valid CSR spending. These include:
- Eradicating hunger, poverty, and malnutrition
- Promoting education and vocational skills
- Gender equality and women empowerment
- Environmental sustainability and ecological balance
- Protection of national heritage, art, and culture
- Rural development projects
- Disaster management and relief
- Promotion of sports
- Contribution to technology incubators
- Supporting Swachh Bharat, Skill India, and Digital India initiatives
- Slum area development
- PM CARES Fund contributions
Activities must be outside the company’s normal course of business and must genuinely benefit communities, not the company’s own employees.
Implementation Methods
Companies can implement CSR activities through several routes.
1. Direct Implementation
The company itself executes the CSR project through its own teams and resources.
2. Through Registered Implementing Agencies
Companies can partner with:
- Registered trusts, societies, or Section 8 companies
- Public sector undertakings
- International organisations approved by the government
Since the 2021 amendment, implementing agencies must be registered on the MCA CSR portal with a valid CSR registration number.
3. Common CSR Platforms
Two or more companies can collaborate on a single CSR project, pooling funds for larger impact.
The Unspent CSR Amount Rules
This is where the 2021 amendment made the most significant changes. Previously, unspent CSR funds were simply carried forward. Now the rules are stricter.
For Ongoing Projects
Unspent amounts must be transferred to a special unspent CSR account within 30 days of the end of the financial year. The amount must be spent within three years from the date of transfer. If still unspent, it must be transferred to one of the national funds specified in Schedule VII.
For Non-Ongoing Amounts
If the company did not designate an ongoing project, the unspent CSR amount must be transferred directly to the national funds within six months of the financial year end.
This removes the earlier flexibility that allowed companies to sit on unspent funds indefinitely.
Reporting and Disclosure Requirements
Section 135 mandates detailed public disclosure.
- An Annual CSR Report must be attached to the Board’s Report in the company’s Annual Report
- The report must disclose the CSR policy, committee composition, amount mandated, amount spent, and details of each project
- Form CSR-2 must be filed separately with the Registrar of Companies after the 2021 amendment
- Large companies with CSR obligations above ₹10 crore must ensure their CSR projects are evaluated by an independent agency
This public disclosure allows shareholders, regulators, and civil society to scrutinise actual CSR impact.
Penalties for Non-Compliance
The 2021 amendment introduced specific penalties for failures under Section 135.
For the Company
Fine of ₹1 crore to ₹10 crore for failing to spend the mandated CSR amount or failing to transfer unspent funds.
For Officers in Default
Every officer in default — typically the CFO and directors — faces a fine of ₹2 lakh to ₹2 crore.
Earlier, non-compliance only required an explanation in the Board’s Report. The introduction of monetary penalties has made enforcement significantly stricter.
Impact Assessment
From the 2021 amendment, companies with:
- Annual CSR obligation of ₹10 crore or more for three consecutive years, or
- Projects with outlays of ₹1 crore or more completed within a financial year
…must conduct impact assessment through an independent agency. The cost of this assessment can be part of the CSR spend but capped at 2% of total CSR expenditure or ₹50 lakh, whichever is lower.
Common Compliance Failures to Avoid
Several recurring mistakes make CSR compliance vulnerable to penalties.
- Spending CSR funds on activities benefiting only employees or their families
- Using CSR funds for political contributions
- Including administrative overheads beyond the permitted 5% cap
- Working with unregistered implementing agencies
- Failing to file Form CSR-2 separately
- Not completing impact assessments when mandatory
- Treating contributions to government relief funds as routine CSR without proper documentation
A strong internal compliance calendar and dedicated CSR team prevent most of these issues.
The Broader Purpose Behind Section 135
Beyond compliance, Section 135 reflects a governance philosophy — that companies benefiting from Indian markets, labour, and resources have a responsibility to contribute to social development.
India’s CSR mandatory spending framework has channelled thousands of crores annually into education, healthcare, sanitation, skill development, and disaster relief. Tata, Infosys, Reliance, HDFC, and hundreds of other companies now run structured CSR programmes touching millions of beneficiaries.
Final Thoughts
Section 135 compliance is not just a box-ticking exercise. When executed with genuine intent, it builds brand trust, employee pride, community relationships, and long-term goodwill that pure financial metrics cannot capture.
For companies crossing the thresholds, the framework is non-negotiable. But the smarter approach is to treat CSR not as a tax or penalty, but as a strategic investment in the communities where the business operates and grows.
The company that gives back meaningfully rarely has to explain why. Its reputation does that quietly, every single day.
FAQs
Q1. What happens if a company crosses the CSR threshold only in one year?
The obligation applies as long as the threshold is crossed in the immediately preceding financial year.
Q2. Can CSR funds be spent on company employees’ welfare?
No. CSR activities must benefit external communities, not the company’s own employees or their families.
Q3. Is there a cap on administrative expenses under CSR?
Yes. Administrative overheads cannot exceed 5% of total CSR expenditure in a financial year.
Q4. Can a company spend more than 2% on CSR voluntarily?
Yes. Excess spending in one year can be set off against mandatory obligations in the next three financial years.
Q5. Are foreign companies operating in India subject to Section 135?
Yes, if their Indian operations meet the financial thresholds.
Q6. Can CSR activities be conducted outside India?
Generally no. CSR activities must benefit Indian communities, with limited exceptions.
Q7. Is a Section 8 company required to spend on CSR?
Yes, if it meets the financial thresholds, even non-profit Section 8 companies must comply.