Corporate Social Responsibility (CSR) in India Explained

Corporate Social Responsibility (CSR) in India is a legal obligation under Section 135 of the Companies Act, 2013, which requires qualifying companies to spend at least 2 per cent of their average net profits of the preceding three financial years on social and developmental activities. With this provision, which came into force on 1 April 2014, India became the first country in the world to make CSR spending mandatory by statute rather than leaving it to voluntary corporate goodwill.

The law applies to Indian companies as well as to foreign companies operating in India, and it is administered by the Ministry of Corporate Affairs (MCA). Over the years the framework has been tightened through the Companies (Amendment) Act, 2019, the Companies (Amendment) Act, 2020 and the CSR Policy Amendment Rules, 2021, which brought stricter rules on unspent money, impact assessment and implementing agencies.

Key Takeaways

• Section 135 of the Companies Act, 2013 makes CSR spending of at least 2 per cent of average net profits mandatory for companies that cross the prescribed net worth, turnover or profit thresholds.
• India became the first country to make corporate social responsibility spending compulsory by law, with the provision taking effect on 1 April 2014.
• A company qualifies for CSR obligations if, in the preceding financial year, it has a net worth of Rs 500 crore or more, turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more.
• CSR money can be spent only on activities listed in Schedule VII of the Companies Act, 2013, such as education, health care, hunger and poverty eradication, environmental protection and rural development.
• Since the 2019-2021 amendments, unspent CSR funds must be moved to a designated account or to a government-specified fund, and a default attracts monetary penalties on the company and its officers.
• Companies with an average CSR obligation of Rs 10 crore or more in the three preceding years must commission independent impact assessments for large, completed projects.

What is Corporate Social Responsibility in India?

Corporate Social Responsibility in India is the legally mandated practice under which eligible companies commit a fixed share of their profits to social, environmental and economic development. The idea draws on a long Indian tradition of business philanthropy associated with industrial families such as the Tatas, Birlas and Bajajs, who funded schools, hospitals and research institutions well before Independence.

Before 2013, CSR in India was voluntary. The Ministry of Corporate Affairs issued the CSR Voluntary Guidelines in 2009 and the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business in 2011, which encouraged companies to adopt responsible practices but carried no legal force. Public sector enterprises followed separate guidelines issued by the Department of Public Enterprises.

The Companies Act, 2013 replaced the older Companies Act, 1956 and, for the first time, wrote CSR into company law. The provision follows a “comply or explain” logic in its early form, but the later amendments moved India closer to a hard obligation, because unspent money now has to be accounted for and can be penalised.

Which companies must comply with Section 135?

A company must comply with Section 135 if, during the immediately preceding financial year, it had a net worth of Rs 500 crore or more, a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more. Meeting any one of the three tests is enough to trigger the obligation.

The test applies to every kind of company, including private limited companies, public companies, and the Indian branch or liaison offices of foreign companies. The key points of applicability are listed below.

• The obligation begins in the financial year after the year in which any threshold is crossed.
• Net profit for this purpose is calculated under Section 198 of the Companies Act, and excludes profits from overseas branches and dividends received from other Indian companies.
• A company that stops meeting all three thresholds for three consecutive years is no longer required to constitute a CSR Committee, although it must keep its CSR policy and disclosures up to date.
• Government companies are covered in the same way, subject to the guidelines applicable to central public sector enterprises.

How is the 2 per cent CSR amount calculated?

The CSR amount is calculated as at least 2 per cent of the company’s average net profits made during the three immediately preceding financial years. Using an average rather than a single-year figure smooths out the effect of unusually good or bad years.

Net profit is worked out as per the Companies Act, 2013, after deducting items such as profit from branches outside India and certain dividend income. If a company has completed fewer than three years since incorporation, the average is taken over the years it has completed.

Surplus and set-off

Any surplus arising from CSR projects or programmes cannot form part of the company’s business profit and must be ploughed back into CSR. The 2021 rules also allow a company that has spent more than its required amount to set off the excess against its CSR obligation in the following three financial years, subject to Board approval.

Administrative overheads

Expenditure on administrative overheads, meaning the cost of running the CSR function itself, is capped at 5 per cent of the total CSR expenditure of the company for the financial year. This ceiling was introduced by the 2021 rules to prevent a large share of CSR money from being absorbed by internal costs.

What does the CSR Committee do?

The CSR Committee is a committee of the Board of Directors that formulates the company’s CSR policy, recommends the amount to be spent and monitors the implementation of CSR activities. It is the central governance body for CSR inside a company.

The composition rules are as follows.

• A company required to have an independent director must form a committee of three or more directors, at least one of whom is an independent director.
• A private company with only two directors can constitute a committee of those two directors.
• An unlisted public company or a private company that is not required to appoint an independent director need not include one on the committee.
• Where the CSR obligation is Rs 50 lakh or less in a financial year, the company is not required to constitute a CSR Committee, and the functions are performed by the Board itself.

The committee prepares an annual action plan listing the projects, the manner of execution, the fund utilisation schedule, the monitoring mechanism and the details of any impact assessment. The Board approves this plan, discloses the composition of the committee and the CSR policy in its annual report, and places the policy on the company’s website.

What activities qualify under Schedule VII?

Schedule VII of the Companies Act, 2013 lists the activities on which CSR funds may be spent, and these cover most areas of social and economic development. A company cannot count spending that falls outside this list towards its CSR obligation.

Schedule VII is revised periodically by the MCA, and its scope is meant to be interpreted broadly and in line with the spirit of the list. Several kinds of spending are specifically excluded, as explained in the next section.

What spending does not count as CSR?

Spending that does not count as CSR includes activities outside India, contributions to political parties, activities that benefit only the company’s own employees and their families, and any activity undertaken in the normal course of business. The aim of these exclusions is to ensure that CSR money reaches genuine external beneficiaries.

• Contributions of any kind to a political party under Section 182 of the Companies Act are excluded.
• Activities carried out for the exclusive benefit of employees and their families are excluded.
• Sponsorship activities that deliver business benefits through marketing or branding are excluded, unless they fall under eligible heads such as sports.
• Activities carried out outside India do not qualify, except for the training of Indian sports personnel and certain research collaborations.
• Compliance expenditure that the company must incur anyway under other laws, such as pollution control measures required for its own plant, is excluded.

The law also gives preference to the local area and areas around the company’s operations, which reflects the thinking that communities near factories or mines should receive some of the benefit.

What happens to unspent CSR funds?

Unspent CSR funds must be moved into a bank account or a government-designated fund within a fixed time frame, and failure to do so attracts penalties. This rule came through the Companies (Amendment) Act, 2019, which came into effect in 2021 after the necessary rules were notified, and it separated unspent money into two categories.

An “ongoing project” is a multi-year project, with a timeline of up to three years excluding the year of commencement, which the Board has approved in its annual action plan. The company must also explain the reasons for non-spending in its Board report.

The penalty for failure to transfer the money is a fine on the company of twice the unspent amount or Rs 1 crore, whichever is less, while every officer in default faces a penalty of one-tenth of the unspent amount or Rs 2 lakh, whichever is less. The 2020 amendment replaced earlier criminal-style provisions with these civil monetary penalties.

How are implementing agencies and impact assessments regulated?

Implementing agencies are the trusts, societies and Section 8 companies through which most companies actually carry out CSR work, and since 2021 they must be registered with the MCA. Each agency files Form CSR-1 and receives a unique CSR Registration Number, and a company can route CSR funds only through registered entities.

The agency must have a track record of at least three years in similar activities, unless it is established by the company itself, a company-promoted foundation, or a body set up under a statute. This requirement is meant to stop shell entities from absorbing CSR money.

Impact assessment

The 2021 rules introduced a mandatory impact assessment for larger CSR spenders. A company with an average CSR obligation of Rs 10 crore or more in the three immediately preceding financial years must undertake an independent impact assessment of projects with an outlay of Rs 1 crore or more that have been completed at least one year earlier.

The company may spend up to 5 per cent of its total CSR expenditure for the year, or Rs 50 lakh, whichever is higher, on these assessments, and the reports go to the Board. This was a notable step toward measuring outcomes rather than counting rupees spent.

How does CSR reporting work?

CSR reporting works through disclosures in the Board’s report, the company’s website and the filings made with the MCA. Every eligible company must include an annual report on CSR in its Board report in a prescribed format, describing the policy, the committee, the projects undertaken and the amount spent.

The MCA also runs the National CSR Portal, where companies file Form CSR-2, a separate filing of details of CSR spending that became mandatory from financial year 2020-21 onward. Because this data is public, researchers and civil society groups can analyse where CSR money goes.

The aggregate pattern has been consistent across years. Education and health care have received the largest shares of reported spending, followed by rural development, environment and livelihood programmes, while spending has tended to concentrate in states where large corporations have their headquarters and plants, such as Maharashtra, Karnataka, Gujarat and Tamil Nadu. Aspirational and remote districts have historically received less.

What are the main criticisms and debates around CSR in India?

The main criticisms of CSR in India are that it can become a box-ticking exercise, that it encourages greenwashing and image management, and that its geographic spread is uneven. Supporters argue that the law has still channelled large, predictable sums to development work that would otherwise be absent.

• Greenwashing and image building: Critics argue that some companies use CSR spending mainly for branding, publicity and reputation repair, rather than for sustained community outcomes.
• Tax-like character: Because the 2 per cent is a legal requirement and CSR expenditure is not allowed as a business deduction under the Income-tax Act, some commentators describe it as an additional levy, while the government maintains it is a responsibility and not a tax.
• Administrative overhead limits: The 5 per cent ceiling is welcomed as a check on leakage, but implementing agencies sometimes argue that it is too low to cover monitoring, training and capacity building.
• Regional concentration: A large part of the spending flows to a small number of states, leaving poorer regions with less.
• Short-term focus: Annual spending cycles can discourage long-term projects, which the three-year “ongoing project” category tries to address.
• Measurement: Reported outputs such as number of toilets built or students enrolled are easier to count than lasting outcomes, which is why impact assessment was introduced.

The law also interacts with other disclosure regimes. Listed companies additionally report on environmental, social and governance matters through the Business Responsibility and Sustainability Report (BRSR) mandated by the Securities and Exchange Board of India (SEBI), which is a separate framework from CSR under the Companies Act.

How has CSR law in India evolved?

CSR law in India has evolved from voluntary guidelines in 2009 to a mandatory spending rule in 2014 and then to a stricter compliance regime between 2019 and 2021. Each stage added specificity about what companies must do and what happens if they fail.

Over this period, CSR expenditure in India has grown into one of the larger sources of private development funding, running into tens of thousands of crore rupees each year across thousands of companies. Public figures vary by year and source, so the portal data is the best reference for current numbers.

Why does CSR matter for India’s development?

CSR matters for India’s development because it creates a predictable stream of private money for public needs, especially in education, health care, sanitation and livelihoods, where government budgets face competing demands. It also pushes companies to engage with communities and to report on their social contribution.

CSR cannot replace public spending, and the law does not intend it to. Its role is complementary: it funds pilots, fills gaps, supports civil society organisations and tests models that governments may later scale up. The long-term test of the framework lies in whether the spending leads to measurable improvements in outcomes, which is why impact assessment, local focus and agency registration form the current direction of reform.

Bottom Line

Corporate Social Responsibility in India is a mandatory, board-supervised obligation under Section 135 of the Companies Act, 2013, requiring eligible companies to spend at least 2 per cent of average net profits on Schedule VII activities. The framework has matured from a pioneering experiment into a regime with strict rules on unspent funds, registered implementing agencies and impact assessment, while debates continue about quality, concentration and real-world impact.

Frequently Asked Questions

Is CSR mandatory in India?

Yes, CSR is mandatory for companies that meet the prescribed thresholds under Section 135 of the Companies Act, 2013. A company with a net worth of Rs 500 crore or more, turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more must spend at least 2 per cent of its average net profits of the previous three years on CSR. India was the first country to make such spending compulsory by law.

What is the 2 per cent CSR rule in India?

The 2 per cent CSR rule requires eligible companies to spend at least 2 per cent of their average net profits of the three preceding financial years on activities listed in Schedule VII. Net profit is calculated as per Section 198 of the Companies Act, 2013. The rule applies from the financial year after a company crosses any of the three thresholds.

What happens if a company does not spend its CSR amount?

If a company does not spend its CSR amount, it must transfer the unspent money to a designated account or fund within the prescribed time. Funds for an ongoing project go to an Unspent CSR Account and must be used within three years, while other unspent funds go to a Schedule VII fund within six months. Failure to transfer attracts a fine of twice the unspent amount or Rs 1 crore, whichever is less, on the company, and a penalty on each officer in default.

Which activities are allowed under CSR in India?

Activities allowed under CSR are those listed in Schedule VII of the Companies Act, 2013. They include eradicating hunger and poverty, promoting education and health care, gender equality, environmental sustainability, protection of heritage, support for armed forces veterans, rural development, slum area development, disaster management and contributions to specified government relief funds.

Who monitors CSR spending in a company?

The CSR Committee of the company’s Board of Directors monitors CSR spending, and the full Board approves the annual action plan and the CSR policy. The committee usually has three or more directors, including at least one independent director where the company must have one. Smaller companies with a CSR obligation of Rs 50 lakh or less can have the Board itself perform these functions.

Can a company claim tax deduction on CSR expenditure?

No, CSR expenditure cannot be claimed as a business expense deduction under the Income-tax Act. The Finance Act, 2014 clarified that spending on CSR activities under Section 135 is not treated as business expenditure. Companies should consult the Income-tax Act and a tax professional on how any separate voluntary donations are treated.

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