CSR Compliance Guide for Companies Under Section 135

CSR compliance companies operating in India must follow the rules laid down under Section 135 of the Companies Act, 2013, which mandates eligible companies to spend at least 2% of their average net profits on social welfare activities. Every company with a net worth exceeding ₹500 crore, turnover exceeding ₹1,000 crore, or net profit exceeding ₹5 crore during the immediately preceding financial year falls under the CSR mandate. Since the 2020 amendment, non-compliance attracts monetary penalties on both the company and its officers in default, making CSR compliance a Board-level priority rather than a voluntary initiative.

This guide covers every aspect of CSR compliance for FY 2025-26 and FY 2026-27, including applicability thresholds, CSR Committee formation, 2% spending calculation, Schedule VII eligible activities, Form CSR-1 registration, Annual Action Plan preparation, Form CSR-2 filing, impact assessment requirements, penalty provisions, and carry-forward rules. Total CSR compliance cost (excluding the CSR spend itself) ranges from ₹25,000 to ₹5 lakh per year depending on company size and number of projects.

What is CSR Under Section 135?

Corporate Social Responsibility (CSR) under Section 135 of the Companies Act, 2013, is a statutory requirement that compels qualifying companies to allocate a portion of their profits toward social welfare, environmental sustainability, and community development activities. India became the first country to mandate CSR spending through legislation when Section 135 was enacted in April 2014. The provision applies to companies of every type registered under the Companies Act, including Private Limited, Public Limited, One Person Companies, Section 8 Companies, and foreign company branches operating in India.

The CSR framework requires companies to form a dedicated CSR Committee at the Board level, adopt a formal CSR Policy identifying focus areas from Schedule VII of the Act, calculate a minimum spending obligation of 2% of average net profits, and report compliance annually through Form CSR-2 filed as an addendum to Form AOC-4. The Ministry of Corporate Affairs administers CSR provisions through the MCA V3 portal at mca.gov.in, while the Companies (CSR Policy) Rules, 2014 (amended in 2021) provide detailed procedural requirements.

CSR compliance is not a one-time activity. Companies must reassess applicability each financial year, update the Annual Action Plan, execute projects, track expenditure, and file annual disclosures. The 2021 amendment to the CSR Rules introduced the Annual Action Plan requirement, tightened unspent amount transfer deadlines, and made impact assessment mandatory for high-spending companies. These changes transformed CSR from a "comply or explain" framework into a "comply or face penalties" regime.

Who Needs to Comply with CSR?

Section 135(1) of the Companies Act, 2013, sets 3 independent thresholds for CSR applicability. A company must comply with CSR provisions if it meets any one of the following criteria during the immediately preceding financial year. The thresholds are assessed annually based on the audited financial statements.

The trigger is based on the immediately preceding financial year. If a company crosses any one threshold in FY 2024-25, CSR provisions apply for FY 2025-26. The company must constitute a CSR Committee, formulate a CSR Policy, and begin spending from FY 2025-26 itself.

CSR applicability covers all company types registered under the Companies Act, 2013: Private Limited Companies, Public Limited Companies, One Person Companies, Section 8 Companies, and Indian subsidiaries or branches of foreign companies. LLPs, partnership firms, and sole proprietorships do not fall under Section 135.

Once triggered, CSR obligations continue until the company fails to meet all 3 thresholds for 3 consecutive financial years. Under the proviso to Section 135(1), a company that was covered under CSR but ceases to meet any threshold must continue CSR obligations for the current year and can exit only after 3 consecutive non-qualifying years. Even after exit, ongoing CSR projects committed through the Unspent CSR Account must be completed.

CSR Committee Formation and Composition

Section 135(1) mandates every company meeting CSR thresholds to constitute a CSR Committee of the Board. The Committee is the central decision-making body for CSR activities. It formulates the CSR Policy, prepares the Annual Action Plan, recommends the spending amount, monitors project execution, and reviews CSR performance. The Board must constitute the Committee through a formal Board resolution passed at a properly convened Board meeting.

Composition Rules

The Chairperson of the CSR Committee is typically a senior independent director in listed companies or the Managing Director in unlisted Private Limited Companies. The Committee must meet at least twice per financial year to review the Annual Action Plan progress, approve modifications, and finalise the CSR-2 disclosure before filing.

All CSR Committee members must hold a valid Director Identification Number (DIN) and complete DIR-3 KYC annually. The composition of the CSR Committee must be disclosed in the Board Report attached to the Annual General Meeting notice. Changes in Committee composition require a fresh Board resolution and updated disclosure in the subsequent Board Report.

How to Calculate 2% CSR Spending

Section 135(5) requires eligible companies to spend at least 2% of the average net profits of the immediately preceding 3 financial years on CSR activities. Net profit for this purpose is calculated under Section 198 of the Companies Act, 2013, which differs from the accounting net profit reported in the Profit and Loss Account.

CSR Net Profit Calculation Formula

The formula for calculating the CSR obligation is:

CSR Obligation = 2% x [(Net Profit FY1 + Net Profit FY2 + Net Profit FY3) / 3]

When calculating net profit under Section 198, include all revenue profits and exclude the following items:

Worked Example

Consider a Private Limited Company with the following net profits (calculated under Section 198):

This company must spend at least ₹20,66,667 on Schedule VII activities during FY 2025-26. If the company has been operational for only 1 or 2 years, calculate the average based on available years. A company in its first year of CSR applicability uses only the preceding year's net profit without averaging.

Schedule VII: Eligible CSR Activities

Schedule VII of the Companies Act, 2013, provides an exhaustive list of activities that qualify as CSR expenditure. Companies must ensure that every rupee of CSR spending falls within one of these categories. Activities outside Schedule VII do not count toward the 2% obligation, regardless of their social benefit.

The 2021 amendment added contributions to incubators funded by the central or state government, and expanded disaster management to cover COVID-19 related activities. Contributions to PM CARES Fund qualify as CSR under item (viii). All Schedule VII activities must benefit the public at large; activities restricted to company employees or their families do not qualify.

Step-by-Step CSR Compliance Process

Step 1: Check CSR Applicability Under Section 135(1)

Review your company's audited financial statements for the immediately preceding financial year to determine if any of the 3 CSR thresholds are met: net worth exceeding ₹500 crore, turnover exceeding ₹1,000 crore, or net profit exceeding ₹5 crore. Use the Balance Sheet for net worth, the Statement of Profit and Loss for turnover, and Section 198 calculation for net profit. If any single threshold is triggered, CSR provisions apply from the current financial year. Document the applicability assessment in the Board Report.

Step 2: Constitute the CSR Committee of the Board

Pass a Board resolution constituting the CSR Committee with the required number of directors. For companies with 3 or more directors and an independent director on the Board, the Committee must have at least 3 members including 1 independent director. Private Limited Companies exempt from appointing an independent director form a 2-member Committee. Name the Chairperson, define the Committee's terms of reference, and record the resolution in the minutes book. File the Committee composition with the ROC.

Step 3: Formulate and Approve the CSR Policy

The CSR Committee drafts a CSR Policy identifying the focus areas from Schedule VII that the company will address. The policy document must include: the company's CSR vision statement, selected Schedule VII activity categories with rationale, implementation approach (direct execution or through implementing agencies), geographic focus areas, monitoring and evaluation framework, and guidelines for fund allocation. The Board approves the policy through a Board resolution and publishes it on the company website within 30 days of approval.

Step 4: Calculate the 2% CSR Spending Obligation

Calculate 2% of the average net profits of the immediately preceding 3 financial years under Section 198. For companies in their first or second year of operations, use the available years for averaging. Prepare a detailed computation sheet showing the net profit for each year, adjustments for excluded items (dividend income from Indian companies, overseas branch profits, capital gains on sale of undertaking), and the final CSR obligation amount. Get the computation certified by the company's Chartered Accountant.

Step 5: Register Implementing Agency via Form CSR-1

If the company plans to implement CSR projects through an external agency (Section 8 company, registered trust, or registered society), ensure the agency registers on the MCA V3 portal using Form CSR-1. The agency must provide its registration certificate, PAN, description of CSR activities, and details of ongoing projects. The ROC issues a unique CSR Registration Number after verification. Processing takes 7 to 15 working days. Companies implementing CSR directly through their own staff do not need CSR-1 registration.

Step 6: Prepare the CSR Annual Action Plan

The CSR Committee prepares a detailed Annual Action Plan for the financial year, which the Board must approve before the start of the year. The plan specifies: project name and description, Schedule VII item number, implementation mode (direct or through agency), implementing agency name and CSR Registration Number, geographic location (state, district), estimated budget per project, implementation timeline (start and end dates), and expected measurable outcomes. The Board approves the plan by resolution. Any modification during the year needs fresh Board approval.

Step 7: Execute CSR Projects Under Schedule VII

Implement CSR activities as per the approved Annual Action Plan. Maintain separate project-wise accounts in the company's books to track CSR expenditure. Administrative overheads (staff salaries, travel, monitoring costs) cannot exceed 5% of total CSR expenditure for the year. Ensure all implementing agencies have valid CSR Registration Numbers before transferring funds. The CSR Committee reviews progress quarterly and reports to the Board on budget utilisation, project milestones, and deviations from the Annual Action Plan.

Step 8: Transfer Unspent CSR Amount as Required

If the company does not spend the full CSR obligation during the financial year, Section 135(6) requires the following transfers. For amounts related to ongoing projects: transfer to an Unspent Corporate Social Responsibility Account (a dedicated bank account) within 30 days of the end of the financial year; spend this amount within 3 financial years from the transfer date. For amounts not related to ongoing projects: transfer to a Fund specified in Schedule VII (PM National Relief Fund, PM CARES Fund, or other notified fund) within 6 months of the end of the financial year.

Step 9: Conduct CSR Impact Assessment (If Required)

Companies with an average CSR obligation of ₹10 crore or more in the preceding 3 financial years must conduct an impact assessment for every CSR project with an outlay of ₹1 crore or more. Engage an independent agency (not the implementing agency) to evaluate project outcomes against stated objectives, measure community benefit, assess sustainability, and provide improvement recommendations. The impact assessment cost counts within the 5% administrative overhead cap or ₹50 lakh, whichever is less. Include the assessment report in the Board Report.

Step 10: File Form CSR-2 as Addendum to AOC-4

File Form CSR-2 on the MCA V3 portal as an addendum to Form AOC-4. Log in to mca.gov.in, select Form CSR-2, enter the company CIN, and fill in: CSR obligation amount, total CSR expenditure, project-wise details (activity, location, amount, agency CSR Registration Number), unspent amount details, ongoing project status, and impact assessment summary (if applicable). The form must be digitally signed by the Company Secretary and a Director, and certified by a CA in practice. The government filing fee is ₹200. File along with AOC-4 within 30 days of the Annual General Meeting.

CSR-1 Registration on MCA Portal

Form CSR-1 is the mandatory registration form for any entity that wants to act as a CSR implementing agency. Under Rule 4(1) of the Companies (CSR Policy) Rules, 2014, every Section 8 company, registered public trust, and registered society must register on the MCA portal and obtain a unique CSR Registration Number before receiving CSR funds from any company.

Who Must File CSR-1

CSR-1 must be filed by the implementing agency, not by the company spending CSR funds. The following entities need CSR-1 registration:

• Section 8 Companies registered under the Companies Act, 2013, established for promoting social welfare activities
• Registered Public Trusts created under the Indian Trusts Act, 1882, or relevant state trust legislation
• Registered Societies formed under the Societies Registration Act, 1860, with charitable or social welfare objectives

Companies that implement CSR projects directly (using their own employees and resources) do not need CSR-1 registration. However, they must still maintain project-wise accounts and report expenditure in Form CSR-2.

CSR-1 Filing Procedure

The implementing agency's authorised representative logs into the MCA V3 portal at mca.gov.in. Navigate to the CSR-1 filing section under the MCA Services menu. Enter the entity type (Section 8 company, trust, or society), provide the registration certificate number, PAN of the entity, registered office address, details of directors or trustees, and a description of CSR activities the agency plans to undertake. Upload the registration certificate and PAN card as attachments. Submit the form with the authorised signatory's digital signature. The ROC reviews the application and issues a unique CSR Registration Number within 7 to 15 working days.

The CSR Registration Number is valid until the ROC revokes it. Companies must verify that every implementing agency they engage holds a valid CSR Registration Number before transferring CSR funds. Transfer of funds to an unregistered agency does not qualify as CSR expenditure and will be treated as a non-compliance by the ROC during inspection.

CSR Annual Action Plan

The CSR Annual Action Plan became a mandatory requirement under Rule 5(2) of the Companies (CSR Policy) Rules, 2014 (as amended in 2021). The CSR Committee must prepare the Annual Action Plan before the start of each financial year, and the Board must approve it through a formal Board resolution. The plan serves as the operational blueprint for CSR spending during the year and provides the basis for reporting in Form CSR-2.

Mandatory Contents of the Annual Action Plan

The Annual Action Plan must include the following details for each CSR project:

• Project name and description -- Clear identification of the activity and its objectives
• Schedule VII item number -- The specific category from Schedule VII under which the activity qualifies
• Implementation mode -- Direct implementation by the company or through an implementing agency
• Implementing agency details -- Name, CSR Registration Number (from CSR-1), and contact information
• Geographic location -- State, district, and specific area where the project will be executed
• Estimated budget -- Project-wise allocation from the total CSR obligation
• Timeline -- Start date, milestones, and expected completion date
• Expected outcomes -- Measurable impact indicators (number of beneficiaries, area covered, etc.)

Any modification to the approved Annual Action Plan during the year requires the CSR Committee to recommend changes and the Board to approve them through a fresh resolution. All modifications must be disclosed in Form CSR-2. Companies with multiple CSR projects across different geographies must prepare individual project sheets that consolidate into the overall Annual Action Plan.

CSR Reporting and Filing Requirements

CSR reporting involves 3 layers of disclosure: the Board Report, Form CSR-2 filed with the ROC, and the company website. Each layer serves a different regulatory purpose and has specific content requirements mandated by the CSR Rules.

Board Report Disclosure (Section 134(3)(o))

The Board Report attached to the financial statements must include an annual report on CSR activities in the format prescribed by Annexure-II of the CSR Rules. The report contains: CSR Committee composition, CSR Policy web link, CSR obligation amount, total expenditure, project-wise details, unspent amount explanation, impact assessment summary (if applicable), and a responsibility statement signed by the CSR Committee Chairperson and the CEO or Managing Director. The Board Report is presented at the Annual General Meeting.

Form CSR-2 (Annual Filing with ROC)

Form CSR-2 is the primary regulatory filing for CSR compliance. Filed as an addendum to Form AOC-4 on the MCA V3 portal, CSR-2 captures the complete CSR performance for the financial year. The form requires:

• Company CIN, name, and financial year details
• Total CSR obligation calculated under Section 135(5)
• Amount spent on CSR during the year (project-wise breakup)
• Details of implementing agencies (name, CSR Registration Number, amount transferred)
• Unspent amount with reasons for shortfall and transfer details
• Ongoing project status (original allocation, amount spent, balance, expected completion year)
• Impact assessment summary (if average CSR obligation exceeds ₹10 crore)
• Excess CSR amount carried forward from or to other years

The form must be digitally signed by the Company Secretary (or a Director where CS is not appointed) and a Director who is a member of the CSR Committee. A Chartered Accountant in practice must certify the form. The government filing fee is ₹200. Late filing of CSR-2 attracts the same penalty structure as late AOC-4 filing.

Website Disclosure

Companies meeting CSR thresholds must publish the CSR Policy on their official website within 30 days of Board approval. The website must also display the composition of the CSR Committee and details of CSR activities undertaken during the year. This requirement is separate from the statutory filings and is verified during ROC inspections and credit rating assessments.

CSR Impact Assessment

CSR impact assessment became mandatory under Rule 8(3) of the Companies (CSR Policy) Rules, 2014 (as amended in 2021), for companies with significant CSR spending. The assessment evaluates the actual impact of CSR projects on beneficiary communities and provides data-driven insights for improving future CSR strategy.

When is Impact Assessment Mandatory?

Impact assessment is required when both conditions are met:

• The company's average CSR obligation is ₹10 crore or more in the 3 immediately preceding financial years
• The CSR project being assessed has an outlay of ₹1 crore or more

Companies below these thresholds may conduct voluntary impact assessments, but they are not mandatory. The assessment must be conducted by an independent agency that is not the implementing agency. The independent agency must have expertise in social impact evaluation, development studies, or a related field.

Impact Assessment Process

The independent agency conducts field visits, surveys, interviews with beneficiaries, and data analysis to evaluate: project outcomes against stated objectives, number of beneficiaries reached, community perception and satisfaction, sustainability of impact beyond the project period, and areas for improvement. The assessment report is presented to the CSR Committee, included in the Board Report, and summarised in Form CSR-2.

The cost of conducting the impact assessment is treated as CSR administrative overhead and cannot exceed 5% of total CSR expenditure or ₹50 lakh, whichever is less. This cost is in addition to the 5% overall administrative overhead cap, meaning it is calculated within the total 5% cap, not as a separate allowance.

Penalties for CSR Non-Compliance

The Companies (Amendment) Act, 2019, introduced Section 135(7), which imposes monetary penalties on both the company and its officers in default for CSR non-compliance. Before this amendment, companies could explain non-spending in the Board Report without facing penalties. The current regime makes non-compliance financially punitive.

"Officers in default" typically include directors who are members of the CSR Committee, the Managing Director or CEO, and the Company Secretary. The penalty is triggered when the company fails to spend the mandatory 2% AND fails to transfer the unspent amount as required under Section 135(5) and Section 135(6).

Penalty Calculation Example

If a company has a CSR obligation of ₹50 lakh and spends only ₹20 lakh, the unspent amount is ₹30 lakh. If the company also fails to transfer the ₹30 lakh to the Unspent CSR Account or Schedule VII Fund:

• Company penalty: 2 x ₹30 lakh = ₹60 lakh (less than ₹1 crore, so penalty is ₹60 lakh)
• Each officer in default: 1/10th of ₹30 lakh = ₹3 lakh, but capped at ₹2 lakh (so penalty is ₹2 lakh per officer)

The penalty is in addition to the requirement to spend or transfer the unspent amount. Paying the penalty does not absolve the company from the CSR spending obligation. The company must still transfer the unspent amount to the Unspent CSR Account or Schedule VII Fund even after paying the penalty.

Excess CSR Spending and Carry Forward Rules

Rule 7(3) of the Companies (CSR Policy) Rules, 2014, allows companies that spend more than their CSR obligation in a financial year to set off the excess amount against the CSR obligation of the immediately succeeding 3 financial years. This provision encourages companies to invest in large CSR projects without worrying about year-wise spending limits.

How Carry Forward Works

If a company's CSR obligation for FY 2025-26 is ₹40 lakh and it spends ₹65 lakh on an education project, the excess of ₹25 lakh can be set off as follows:

The excess amount must be documented in the Board Report and reported in Form CSR-2 for both the year of excess spending and the year of set-off. The set-off is available only if the Board passes a resolution specifically recording the intent to carry forward the excess amount. Without the Board resolution, the excess spending is treated as voluntary CSR and cannot be set off.

Excess CSR set-off does not apply to surplus arising from CSR activities that generate returns. If a CSR project generates any revenue or return on investment, that revenue must be ploughed back into the same project or transferred to the Unspent CSR Account. The carry-forward provision applies only to voluntary excess spending above the 2% obligation.

Common Mistakes in CSR Compliance

The Ministry of Corporate Affairs has issued multiple circulars highlighting recurring non-compliance patterns. Avoiding these mistakes ensures smooth ROC inspections and prevents penalties under Section 135(7).

1. Incorrect Net Profit Calculation

Companies frequently use accounting net profit instead of Section 198 net profit for the 2% calculation. Section 198 excludes dividend income from Indian companies, profits from overseas branches, and capital gains on sale of undertakings. Using accounting net profit inflates the CSR obligation unnecessarily, or worse, understates it when excluded items are negative. Always prepare a separate Section 198 computation sheet certified by your CA.

2. Spending on Non-Schedule VII Activities

CSR expenditure on activities not covered under Schedule VII does not count toward the 2% obligation. Common disqualified expenses include: employee welfare programmes (gym memberships, health checkups restricted to staff), marketing-related sponsorships, political donations, activities benefiting only company employees and their families, and projects executed outside India (except Indian sports team training selected by the Olympic or Paralympic Committee).

3. Engaging Unregistered Implementing Agencies

Transferring CSR funds to a trust, society, or Section 8 company that has not registered on the MCA portal via Form CSR-1 disqualifies the expenditure. The ROC treats such spending as non-CSR and can demand the company re-spend the amount or transfer it to a Schedule VII Fund. Always verify the implementing agency's CSR Registration Number on the MCA portal before transferring funds.

4. Missing the 30-Day Unspent Transfer Deadline

Section 135(6) requires companies to transfer unspent amounts related to ongoing projects to the Unspent CSR Account within 30 days of the financial year end (by 30 April for FY ending 31 March). Missing this deadline by even 1 day triggers penalty provisions under Section 135(7). Many companies miss this because the 30-day window falls during the audit preparation period when finance teams are occupied.

5. Exceeding the 5% Administrative Overhead Cap

CSR administrative overheads (staff salaries, travel, monitoring, capacity building) cannot exceed 5% of total CSR expenditure for the year. Companies with small CSR obligations (₹10-20 lakh) often breach this cap because fixed administrative costs form a disproportionate share. Track administrative costs monthly and allocate budgets at the start of the year to stay within the 5% limit.

6. No Board Resolution for Excess Carry Forward

Excess CSR spending can be set off against future years only if the Board passes a specific resolution recording the carry-forward intent. Without this resolution, the ROC treats excess spending as voluntary and denies the set-off in subsequent years. Pass the carry-forward resolution in the same Board meeting where the financial year's CSR accounts are approved.

CSR Compliance Cost Breakdown

CSR compliance involves administrative and professional costs separate from the actual CSR spend. The table below covers the costs a company incurs to manage the compliance process itself.

These costs are separate from the 2% CSR spending obligation. Administrative overheads up to 5% of total CSR expenditure can be counted as CSR spending, which means a portion of the compliance costs above can offset the 2% obligation. Companies with multiple CSR projects and implementing agencies incur higher compliance costs due to project-wise tracking and agency verification requirements.

CSR Compliance Calendar for FY 2025-26

The following calendar maps every critical CSR milestone for a company with a financial year ending 31 March 2026.

Related Resources

• Compliance Services -- End-to-end annual compliance management including CSR filings
• Private Limited Company Compliance -- Annual return, AOC-4, and Board Report filing for Pvt Ltd companies
• ROC Annual Filing -- File AOC-4 and MGT-7 with the Registrar of Companies
• Section 8 Company Registration -- Register a not-for-profit company to act as a CSR implementing agency
• Secretarial Compliance Services -- Board resolution drafting, Committee formation, and CS certification
• ADT-1 Auditor Appointment Filing -- File auditor appointment with the MCA for statutory audit
• Compliance Health Check -- Review pending ROC filings, CSR obligations, and director KYC status
• Private Limited Company Registration -- Register a new Pvt Ltd company with CSR-ready compliance setup

Summary

CSR compliance under Section 135 of the Companies Act, 2013, requires eligible companies (net worth > ₹500 crore, turnover > ₹1,000 crore, or net profit > ₹5 crore) to spend 2% of average net profits on Schedule VII activities. The compliance process involves 10 steps: checking applicability, forming a CSR Committee with 3+ directors, drafting a CSR Policy, calculating the 2% obligation under Section 198, registering implementing agencies via CSR-1, preparing the Annual Action Plan, executing projects, transferring unspent amounts within prescribed deadlines, conducting impact assessments (if average obligation exceeds ₹10 crore), and filing Form CSR-2 as an addendum to AOC-4.

Non-compliance attracts penalties under Section 135(7): the company faces a fine of twice the unspent amount or ₹1 crore (whichever is less), and each officer in default faces 1/10th of the unspent amount or ₹2 lakh (whichever is less). Excess CSR spending can be carried forward for up to 3 years with a Board resolution. Annual compliance costs (excluding CSR spend) range from ₹25,000 to ₹1,30,000, with impact assessment adding ₹2 lakh to ₹5 lakh for high-spending companies.