Corporate Social Responsibility Under Section 135: What every Company Needs to Know

Jun 18
6 min read

Introduction

The Corporate Social Responsibility is not only a feel-good activity that companies do on the side. In India, it is a legal requirement written into the Companies Act, 2013, and companies that meet certain financial criteria are expected to follow it seriously. Yet, despite being in force for over a decade, many business owners, finance teams, and even young professionals find the rules around CSR a bit confusing. This blog tries to break down Section 135 of the Companies Act in plain language, covering who needs to comply, how much they need to spend, what activities count, how the reporting works, and what happens if a company decides to ignore it altogether.

Mandates under Section 135: The Basic Idea

Section 135 of the Companies Act, 2013 was a landmark step because India became one of the first countries in the world to make CSR spending a legal obligation rather than a voluntary choice. The underlying idea is simple which stated “companies that have grown to a certain size and profitability owe something back to the society that helped them grow”. So, instead of leaving CSR to the goodwill of a company's management, the law requires qualifying companies to set up a CSR Committee, frame a CSR policy, and spend a minimum amount every year on activities that is genuinely help and benefit communities, the environment, or society at large.

This obligation is read together with the Companies (Corporate Social Responsibility Policy) Rules, 20142, which fill in the procedural details, and Schedule VII of the Act, which lists out the kinds of activities that can be counted as CSR. The Ministry of Corporate Affairs (MCA) supervises the entire framework and also runs a dedicated CSR portal where companies and implementing agencies register themselves.

Which Companies Are Covered: The Threshold Limits

CSR provisions in India apply only to companies that meet any one of the following thresholds in the immediately preceding financial year:

Turnover of ₹1,000 crore or more, or Net worth of ₹500 crore or more, or Net profit of ₹5 crore or more.

This applies to both Indian companies and the World companies which has branch/project offices in India.

Recently, the Corporate Laws (Amendment) Bill, 2026 proposes to increase the net profit threshold from ₹5 crore to ₹10 crore, while keeping net worth and turnover limits unchanged.

Until the Bill is passed and notified, companies must continue complying with the existing ₹5 crore threshold. Compliance teams should monitor this development closely.

How Much Does a Company Need to Spend?

Once a company meets the CSR thresholds, it must spend at least the 2 percent of an average net profits of the three immediately preceding financial years on CSR activities. Using a three-year average helps smooth out profit fluctuations.

If the company fails to spend the full amount in a year, the unspent portion must be handled as follows:

For ongoing projects: Transferred to a separate Unspent CSR Account and spent within the next three financial years.
For other cases: Transferred to funds specified under Schedule VII.

This carry-forward and transfer mechanism ensures companies cannot simply ignore their CSR obligation in lean years.

What Counts as a CSR Activity

The Companies Act, 2013 - Schedule VII have eligible CSR activities, including:

Eradicating hunger and poverty
Promoting education, gender equality, and women’s empowerment
Environmental sustainability
National heritage, art, and culture protection
Support for armed forces veterans
Contributions to technology incubators
Rural development and disaster management

These provide companies flexible to align with CSR strengths while serving public good.

Important Exclusions - Routine business activities, benefits limited to company employees and families, political contributions, and purely marketing or brand promotion activities do not qualify as CSR. Regulators are increasingly vigilant against such greenwashing.

Setting Up the CSR Committee and Policy

Companies meeting the CSR thresholds has to be constitute CSR Committee, shall have at least 3 directors, at least one independent director (with relaxations for smaller companies).

The Committee is responsible for:

Formulating the CSR Policy
Recommending the amount of expenditure
Monitoring the implementation of CSR projects

The Board must approve the CSR Policy, disclose it in the Board’s Report, and upload it on the company’s website.

If company wishes to undertake CSR activities through external implementing agencies such as trusts, societies, or Section 8(1)3 companies, such entities must be registered with the MCA via Form CSR-1.

Reporting: Form CSR-1 and Form CSR-2

Form CSR-1: One-time registration form filed by entities intending to undertake CSR activities on behalf of companies. It generates a CSR Registration Number.

Form CSR-2: Annual reporting form required for companies under Section 135. It provides details of CSR projects, spending, unspent amounts, and related disclosures for the financial year. It would be filed separately, with after filing financial statements (AOC-4/AOC-4 XBRL).

Additionally, companies must disclose CSR information in their Board’s Report, including CSR Committee composition, policy, amounts spent, and reasons for unspent amounts. Companies with the average CSR obligations of ₹10 crore or more (over the preceding three years) must also get an impact assessment of major projects conducted by an independent agency.

What Happens If a Company Does Not Comply: Penalties

Long time since, CSR non-compliance in India was treated leniently as a “comply or explain” requirement. However, the 2019 and 2020 amendments to the law made penalties much stricter, replacing criminal liability with direct monetary penalties for faster enforcement.

Penalties for failing to spend the required CSR amount and transfer unspent funds:

Company- Twice the unspent amount or ₹1 crore, whichever is lower. Every Officer in Default - One-tenth of the unspent amount or ₹2 lakh, whichever is lower. For other violations (e.g., failure to constitute CSR Committee or disclose policy), general penalty provisions apply.

The Corporate Laws (Amendment) Bill, 2026 has softened some of these penalty provisions to promote Ease of Doing Business, shifting CSR gradually towards greater voluntary compliance. This move is being debated whether it will dilute genuine CSR efforts or simply reduce litigation over minor lapses.

A Quick Word on Related Global Trends

While Section 135 is an Indian provision, it does not exist in isolation. Globally, there has been a growing poke towards more structured sustainability and accountable business conduct frameworks, such as updated OECD guidelines for multinational enterprises, the European union's growing corporate sustainability reporting and due diligence directions, and international standards like ISO 26000 on social responsibility. Even regulators like the United states’ SEC have, at different points, debated the scope of climate-related disclosure requirements for companies. For Indian companies with global operations or international investors, staying aware of these parallel developments can help in building a CSR and ESG approach that works smoothly both at home and abroad, rather than treating Indian CSR compliance and global sustainability reporting as two completely separate exercises.

Conclusion

Sec. 135 of Companies act - CSR, represents a key feature of law, finance, and social impact in India. For companies, it goes beyond merely ticking a box it requires strong governance structures, thoughtful project planning, accurate record-keeping, and transparent reporting through Form CSR-1 and Form CSR-2.

For legal, compliances, and finances, a clear understanding of the current framework and upcoming changes (such as the 2026 amendments) is an increasingly valuable skill. Companies that adopt genuine, well-implemented CSR practices rather than a purely compliance-driven approach will be better positioned both legally and reputationally in the years ahead.

Author: Nishtha Thakur , in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

References

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