Section 135 of the Companies Act, 2013 makes Corporate Social Responsibility spending mandatory — not aspirational — for companies that cross specified financial thresholds. Once a company becomes CSR-applicable, spending, implementation, and disclosure obligations follow automatically for the relevant financial year, and boards that treat this as a discretionary 'nice to have' tend to discover the compliance requirements only when their statutory auditor flags an unspent obligation at year-end.
Applicability Threshold
A company is required to constitute a CSR Committee and spend on CSR if, in the immediately preceding financial year, it meets any one of these thresholds:
- Net worth of ₹500 crore or more, or
- Turnover of ₹1,000 crore or more, or
- Net profit of ₹5 crore or more
Applicability is assessed every year based on the preceding year's figures — a company that crosses the threshold once doesn't remain permanently CSR-applicable if its financials later fall below it for three consecutive years, but the compliance obligation isn't something a board can opt out of once it's triggered for a given year.
How Much Must Be Spent
The CSR spending obligation is at least 2% of the average net profit of the company made during the three immediately preceding financial years (calculated as per Section 198 of the Act, which has its own specific adjustments distinct from accounting profit).
CSR Committee and Governance
- Companies meeting the threshold must constitute a CSR Committee of the Board, with at least three directors, including at least one independent director (private companies without an independent director requirement have a modified composition rule).
- The Committee formulates and recommends a CSR Policy to the Board, and monitors its implementation.
- The Board approves the CSR Policy and ensures the company spends the prescribed amount, disclosing the CSR Committee's composition and the policy in the Board's Report — a standard corporate secretarial filing requirement, but one that needs substantive committee minutes and policy documentation behind it, not just a pro-forma disclosure.
Where CSR Funds Can Be Spent
CSR spending must go toward activities specified in Schedule VII of the Act (education, healthcare, environmental sustainability, poverty alleviation, and several other specified categories), implemented either directly or through:
- Section 8 companies, registered trusts, or registered societies with a proven track record
- Government-established entities and specified national funds
- Implementing agencies registered on the CSR-1 portal — since FY 2021-22, any implementing agency must be registered by filing Form CSR-1 before receiving CSR funds; a company disbursing funds to an unregistered implementing agency risks the spending not being recognized as valid CSR expenditure at all.
Filing and Reporting Obligations
- Form CSR-2 — a mandatory annual report on CSR, filed separately from (and in addition to) the standard AOC-4 annual filing, capturing details of CSR spending, unspent amounts, and ongoing projects.
- Board's Report disclosure — CSR Committee composition, policy summary, amount required to be spent, amount actually spent, and reasons for any shortfall.
- Unspent CSR amount treatment — this is where many companies get tripped up:
- Amount unspent for ongoing projects must be transferred to a separate 'Unspent CSR Account' within 30 days of the financial year-end, and spent within three financial years, failing which it must be transferred to a specified fund in Schedule VII.
- Amount unspent for reasons other than an ongoing project must be transferred directly to a specified Schedule VII fund within six months of the financial year-end.
- Failure to transfer unspent amounts within these timelines is a specific compliance default, distinct from the general CSR shortfall disclosure, and carries its own penal consequences.
Common Compliance Gaps for FY 2026
- Missing the CSR-1 registration check before disbursing funds to an implementing partner, risking disallowance of the spend as valid CSR
- Not distinguishing 'ongoing project' unspent amounts from other shortfalls, leading to funds sitting in the wrong account or missing the transfer deadline for the specified fund
- Treating CSR as a marketing or brand-goodwill line item disconnected from the statutory reporting discipline it actually requires — Form CSR-2 and the Board's Report disclosures need to tie out precisely to actual disbursements, verified as part of the year-end accounting and compliance close, not reconstructed after the fact
- Assuming applicability is permanent once triggered, and continuing (or discontinuing) CSR spending without re-checking the threshold against the preceding year's actual financials each year
CSR compliance under Section 135 is not simply a spending target — it comes with specific governance, implementing-agency registration, and unspent-fund transfer rules that carry real penal consequences when missed. Getting the CSR Committee, policy, and CSR-2 filing right each year is squarely a compliance discipline, not a discretionary corporate citizenship gesture.
Perfect Accounting supports CSR applicability assessment, Form CSR-2 filing, and unspent-amount compliance tracking as part of the annual regulatory reporting cycle.