CSR in India is a legal obligation with a spending target, a governance structure, reporting forms and penalties. Since 2019 and 2021 it has worked on a “comply or pay” basis, and 2025 and 2026 have added changes to implementing-agency registration and a new exchange-linked route. This guide covers the framework from applicability to filings.
1. The legal framework
| Source | What it governs |
|---|---|
| Section 135, Companies Act, 2013 | Applicability, CSR Committee, spending, unspent amounts, penalty |
| Schedule VII | The activities that qualify |
| Companies (CSR Policy) Rules, 2014, as amended | Procedure, implementing agencies, impact assessment, reporting |
| Form CSR-1 | Registration of entities that wish to undertake CSR |
| Form CSR-2 | Annual CSR reporting to the Registrar |
2. Who must comply
Section 135(1) applies to every company, including a holding or subsidiary company and a foreign company with a branch or project office in India, that has during the immediately preceding financial year :
- net worth of ₹500 crore or more, or
- turnover of ₹1,000 crore or more, or
- net profit of ₹5 crore or more.
Meeting any one test is enough. A company that stops meeting all three for three consecutive financial years is released from the obligation until it meets a test again.
Calculating net profit. Net profit is computed under section 198 of the Companies Act, but it excludes profits from overseas branches and dividend income received from other Indian companies that are themselves covered by section 135.
3. How much must be spent
The company must spend at least 2% of the average net profit of the three immediately preceding financial years (s. 135(5)). Preference goes to the local area and areas around the company’s operations.
Worked example (illustrative). A company’s net profits for the last three years are ₹40 crore, ₹50 crore and ₹60 crore.
- Average net profit: ₹50 crore
- Required CSR spend: 2% = ₹1 crore
- Administrative overheads cap: 5% of total CSR expenditure, so ₹5 lakh on ₹1 crore
Set-off. Excess spending in a year can be carried forward and set off against the requirement of the next three financial years, subject to conditions: it cannot be a surplus arising from the CSR projects themselves, and the Board must approve it.
4. Governance: Committee and Board
CSR Committee
- Three or more directors, with at least one independent director. Companies not required to have an independent director need two or more directors.
- A company whose CSR obligation is ₹50 lakh or less in a year need not constitute a Committee. The Board discharges the functions (s. 135(9)).
- The Committee recommends the CSR policy and the amount to be spent, and monitors implementation.
The Board
- Approves the CSR policy, after considering the Committee’s recommendation.
- Approves an annual action plan: projects, mode of execution, fund utilisation, monitoring and reporting.
- Ensures that the activities in the policy are actually carried out.
- Discloses the contents of the policy in the Board’s Report.
Website disclosure. The company must publish the Committee’s composition, the CSR policy and the projects approved by the Board on its website.
5. What qualifies: Schedule VII
| Theme | Examples |
|---|---|
| Hunger, poverty, health | Eradicating hunger and malnutrition, preventive health care, sanitation, safe drinking water |
| Education and livelihoods | Education, special education, employment-enhancing vocational skills |
| Gender and social equality | Gender equality, women’s empowerment, old-age homes, reducing inequalities |
| Environment | Ecological balance, animal welfare, conservation of natural resources, soil, air and water quality |
| Heritage, art, culture | Protection of national heritage and art |
| Armed forces | Benefit of veterans, war widows and dependents |
| Sports | Training for rural sports, nationally recognised sports, Paralympic and Olympic sports |
| Government relief funds | PM National Relief Fund and funds set up by the Central or State Governments |
| Research and incubators | Technology incubators and public-funded research in science, technology, engineering and medicine |
| Rural and slum development | Rural development projects and slum area development |
| Disaster management | Relief, rehabilitation and reconstruction |
What does not count
- Activities in the normal course of business.
- Activities outside India, except training of Indian sports personnel.
- Contributions to political parties.
- Activities that benefit only employees and their families.
- Sponsorships done for marketing benefit.
- Activities done to meet another statutory obligation.
6. Who can carry out the CSR
A company can implement projects itself or through:
- A Section 8 company, registered public trust or registered society established by the company (alone or with others), by the Central or State Government, or under an Act of Parliament or a State legislature.
- Any other Section 8 company, registered public trust or registered society with an established track record of at least three years.
Every implementing agency must be registered through Form CSR-1 and have a CSR registration number. The CSR-1 form was substituted from 14 July 2025, with mandatory PAN, OTP-verified email IDs, the DSC of the authorised officer and certification by a practising CA, CS or CMA who accepts liability for false certification. Commentary generally reads existing registrations as continuing, but the notification is silent on re-filing, so confirm an agency’s current status before disbursing.
7. Unspent CSR
The rules depend on whether the spending relates to an “ongoing project”, meaning a multi-year project with a timeline of not more than three years, excluding the year of commencement.
| Situation | What the company must do |
|---|---|
| Unspent on an ongoing project | Transfer to the Unspent CSR Account within 30 days of year-end, and spend within three financial years |
| Ongoing-project money still unspent after three years | Transfer to a Schedule VII fund within 30 days of the third year ending |
| Unspent on other projects | Transfer to a Schedule VII fund within six months of year-end |
Penalty (section 135(7)).
- The company: twice the unspent amount or ₹1 crore, whichever is less.
- Each officer in default: one-tenth of the unspent amount or ₹2 lakh, whichever is less.
Illustration. A company leaves ₹10 lakh unspent and does not transfer it. The company’s exposure is the lower of ₹20 lakh and ₹1 crore, which is ₹20 lakh. Each officer in default faces the lower of ₹1 lakh and ₹2 lakh, which is ₹1 lakh.
8. Impact assessment
Companies with an average CSR obligation of ₹10 crore or more in the three preceding years must carry out an impact assessment by an independent agency for projects with an outlay of ₹1 crore or more that have been completed for at least one year. The assessment report goes with the Board’s CSR report. The cost of impact assessment can be counted as CSR spend, up to a cap of 5% of the year’s CSR expenditure or ₹50 lakh, whichever is higher.
9. Reporting and disclosure
- Annual report on CSR: an annexure to the Board’s Report in the prescribed format. It covers the policy outline, Committee composition, average net profit, prescribed and actual spend, unspent amount and reasons, set-off details, and a certificate from the CFO or person responsible for financial management that funds were used as the Board approved.
- Form CSR-2: filed with the Registrar as an addendum alongside the financial statements filing (AOC-4). For FY 2025-26, MCA’s General Circular 05/2026 relaxes additional fees on AOC-4 until 31 December 2026. The circular does not mention CSR-2, so confirm its treatment.
- Website: policy, Committee, and approved projects.
10. Tax treatment
CSR expenditure is not allowed as a business expenditure for income tax. Explanation 2 to section 37(1) of the 1961 Act says so, and the position is carried into the 2025 Act. Contributions that qualify for a separate deduction need individual checking. Treat CSR spend as a non-deductible cost when building the tax computation.
11. What changed in 2025 and 2026
| Development | Status |
|---|---|
| CSR-1 substituted (G.S.R. 452(E), notified 7 July 2025, effective 14 July 2025) | In force |
| Rule 4A (Companies (CSR Policy) Amendment Rules, 2026, G.S.R. 415(E), 27 May 2026): companies can spend up to 10% of total CSR expenditure in a year by subscribing to zero coupon zero principal (ZCZP) instruments issued by non-profits registered on the Social Stock Exchange segment | In force. Projects funded this way are exempt from impact assessment. The issuing non-profit has three succeeding financial years to finish the work, and unspent money goes to a Schedule VII fund when the listing ends |
| Corporate Laws (Amendment) Bill, 2026 (introduced 23 March 2026): raise the net profit trigger from ₹5 crore to ₹10 crore; extend the transfer to the Unspent CSR Account from 30 to 90 days; raise the Committee exemption from ₹50 lakh to ₹1 crore; add a power to exempt classes of companies | Pending. A Joint Committee report (3 August 2026) recommended fixing ₹10 crore in the Act itself, questioned the exemption power, proposed a negative list of ineligible implementing agencies, and asked the government to examine in-kind contributions. Until enacted and notified, ₹5 crore of net profit still triggers CSR |
12. Common mistakes
- Paying an agency without checking its CSR-1 number.
- Counting employee-welfare or marketing spend as CSR.
- Misclassifying a project as “ongoing” without a documented Board justification.
- Exceeding the 5% administrative overhead cap.
- Missing the 30-day or six-month transfer dates , which turns an unspent amount into a penalty.
- Computing net profit wrongly , especially dividends and overseas branch profits.
- Weak utilisation evidence. Keep utilisation certificates, photographs, invoices and agency reports.
- Ignoring impact assessment where the ₹10 crore average obligation test is met.
- Inaccurate Board’s Report annexure , which is a common basis for notices.
13. Annual CSR calendar
| When | Action |
|---|---|
| Before or at the start of the year | Test applicability on the preceding year’s numbers; Committee recommends the plan and the Board approves it |
| During the year | Disburse to registered agencies; monitor; track utilisation |
| Within 30 days of year-end (30 April) | Move unspent ongoing-project money to the Unspent CSR Account |
| Within six months of year-end (30 September) | Move other unspent amounts to a Schedule VII fund |
| With the financial statements | Board’s Report annexure, CFO certificate, and CSR-2 |
Checklist
- Confirm applicability using the net worth, turnover and net profit tests.
- Form the CSR Committee, or confirm the ₹50 lakh exemption.
- Adopt the CSR policy and publish it with the Committee and project details on the website.
- Approve the annual action plan.
- Verify CSR-1 registration for each agency.
- Keep spending within Schedule VII and outside the exclusions.
- Track the overhead cap, set-off and impact assessment.
- Transfer unspent amounts on time.
- File the Board’s Report annexure and CSR-2 accurately.
Bottom line: CSR is now a compliance function as much as a philanthropic one. The companies that handle it well treat it like any other statutory process: apply the tests, plan the spend, document utilisation and meet the transfer dates.
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