Corporate Social Responsibility (CSR) Under Companies Act 2013

Corporate Social Responsibility, or CSR, means a company spending part of its profits on activities that help society, such as education, health, clean water, the environment or rural development. In India, CSR is not just a good habit: for large companies, it is compulsory by law. Section 135 of the Companies Act, 2013 says that companies above a certain size must spend at least 2% of their average net profit of the last three years on CSR activities. India was one of the first countries in the world to make CSR spending compulsory by law.

Why does it exist?

Companies use society's resources: land, water, roads, workers and a stable market. The idea behind CSR is that a business that grows by using these resources should also give something back. Think of a big shop in a market that also pays to keep the street clean and lit. The shop benefits too, because customers like coming to a clean street. India also has huge needs in education, health and poverty reduction. CSR brings private money and management skills to these areas, alongside government spending.

Where did it come from?

• Indian business families had a long tradition of charity (philanthropy), such as building schools, hospitals and temples. But it was voluntary and depended on the owner's wishes.
• 2009: The Ministry of Corporate Affairs issued Voluntary Guidelines on CSR.
• 2011: The ministry issued the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business.
• 2013: Parliament passed the Companies Act, 2013, with Section 135 making CSR spending compulsory for large companies.
• 1 April 2014: Section 135, its Schedule VII (list of allowed activities) and the CSR Rules, 2014 came into force.
• 2019 and 2020 amendments: The rules on unspent CSR money were made stricter. The 2019 amendment had made non-compliance a criminal offence; the 2020 amendment replaced this with money penalties instead of jail. The new provisions and revised CSR Rules came into force on 22 January 2021.
• 2026: The Corporate Laws (Amendment) Bill, 2026 proposes to raise the net profit threshold from ₹5 crore to ₹10 crore. As of November 2026, it has been sent to a Joint Parliamentary Committee and is not yet law.

Which companies must spend on CSR? (Section 135(1)) A company must follow the CSR rules if, in the immediately preceding financial year, it had any one of these:

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

This applies to Indian companies, and also to foreign companies with a branch or project office in India.

How much must they spend? (Section 135(5)) At least 2% of the average net profit of the three immediately preceding financial years. For example, if a company's net profits in the last three years were ₹90 crore, ₹100 crore and ₹110 crore, the average is ₹100 crore. Its CSR spending must be at least 2% of ₹100 crore, that is, ₹2 crore. The law also says the company should give preference to the local area around where it operates.

Who decides and monitors CSR? (the CSR Committee)

• A company covered by Section 135 must form a CSR Committee of the Board with at least three directors, of whom at least one must be an independent director (a director not linked to the owners or management). Companies that are not required to have independent directors can have two directors on the committee.
• If the company's CSR spending obligation is ₹50 lakh or less, it need not form a committee; the Board of Directors does the committee's work (Section 135(9), added by the 2020 amendment).
• The committee writes the CSR Policy, recommends how much to spend and on what, and monitors projects. The Board approves the policy, reports on it in its annual Board's Report and puts it on the company website.

What counts as CSR? (Schedule VII)

Schedule VII lists the activities on which CSR money can be spent. The main ones include:

• Ending hunger, poverty and malnutrition; promoting health care and sanitation; safe drinking water.
• Promoting education, including special education and job-oriented skills (vocational skills).
• Gender equality, women's empowerment, and care for orphans and the elderly.
• Environmental sustainability, protection of plants and animals, and soil, air and water quality.
• Protecting national heritage, art and culture.
• Help for armed forces veterans, war widows and their families.
• Training to promote sports.
• Contributions to the Prime Minister's National Relief Fund, the PM CARES Fund and similar government funds.
• Contributions to technology incubators and research and development projects in specified institutions.
• Rural development projects, slum area development, and disaster management.

What does NOT count as CSR?

Activities done as part of the company's normal business, activities that benefit only its own employees, most activities outside India, and contributions to political parties are not counted as CSR.

What happens to unspent money? (Section 135(6)) The law makes sure the money is actually spent:

• If the money is for an ongoing project (a project of up to three years), the unspent amount must be moved to a special Unspent CSR Account within 30 days of the end of the financial year. It must be spent within the next three financial years. If it is still not spent, it goes to a Schedule VII fund (such as PM CARES or the PM's National Relief Fund).
• If the unspent money is not for an ongoing project, it must be transferred to a Schedule VII fund within six months of the end of the financial year.
• If a company spends more than required, it can set off the extra amount against its CSR duty in the next three financial years.

What is the penalty? (Section 135(7)) If a company does not follow the rules on unspent money:

• The company pays a penalty of twice the unspent amount or ₹1 crore, whichever is less.
• Every officer in default pays one-tenth of the unspent amount or ₹2 lakh, whichever is less.

Other important rules

• Administrative overheads (office costs of running CSR) cannot be more than 5% of the year's CSR spending.
• Companies with an average CSR obligation of ₹10 crore or more must get an impact assessment (a check of what the project actually achieved) of large projects done by an independent agency.
• Agencies that carry out CSR work for companies (trusts, societies, Section 8 companies) must register with the MCA using Form CSR-1. Companies report their CSR spending every year in Form CSR-2.
• Tax treatment: CSR spending is not allowed as a business expense for income tax. Explanation 2 to Section 37(1) of the Income Tax Act, 1961, applicable from 1 April 2015, says so. This is to stop companies from passing a part of the CSR cost on to the government through lower taxes.

India's position and examples

• In 2022-23, companies spent about ₹29,987 crore on CSR, as per the National CSR Portal of the MCA. In 2021-22, the figure was about ₹26,616 crore.
• Education got the largest share (about ₹10,085 crore in 2022-23), followed by health care (about ₹6,831 crore). Together they took more than half of all CSR spending.
• CSR spending is concentrated in industrial states like Maharashtra, Gujarat and Karnataka, while many poorer states and districts get much less.
• The PM Internship Scheme is linked to CSR in two ways: companies were chosen by their CSR spending, and the company's share of the stipend and training costs come from CSR funds.

Commonly confused concepts

• CSR vs philanthropy (charity): Philanthropy is voluntary giving by a person or family. CSR under Section 135 is a legal duty of the company, with fixed rules and penalties.
• CSR vs ESG / BRSR: ESG (Environmental, Social and Governance) is about how a company runs its own business responsibly. SEBI's Business Responsibility and Sustainability Report (BRSR) is a disclosure that the top 1,000 listed companies must publish about their ESG performance. CSR is about spending money on social projects, mostly outside the company's business.
• "Comply or explain" vs "comply or pay": When CSR began in 2014, a company that did not spend only had to explain why in its Board's Report. Since the 2019–2020 changes, unspent money must be transferred and penalties apply.
• CSR fund vs government scheme: CSR money is the company's own money, spent under its own policy. A company can support a government programme (like PMIS) through CSR only if the activity falls under Schedule VII.

Issues, criticism and the way forward

• Uneven spread: CSR money goes mostly to states and cities near big industries, while backward regions get little. The rule on preference to local areas adds to this.
• Like a tax: Some industry voices say a compulsory 2% spend works like an extra tax on profitable companies. The government's position is that CSR is about companies taking part in national development using their own expertise.
• Directed spending: Critics worry that when the government links its schemes to CSR (like PM CARES or PMIS), companies may feel pushed towards government priorities rather than local needs.
• Quality and impact: Many companies focus on how much they spend, not what it achieves. Impact assessments, better reporting on the National CSR Portal and partnerships with experienced NGOs can improve results.
• Threshold debate: The proposed rise in the net profit threshold to ₹10 crore would free many smaller companies from the CSR duty. Supporters say it reduces the compliance burden; others say it could reduce total CSR money.

Concepts to Know

• Net profit: A company's income left after paying all its costs and expenses (for CSR, it is calculated under Section 198 of the Companies Act).
• Net worth: The value of what the company owns minus what it owes; roughly, the owners' money in the business.
• Turnover: The total sales income of a company in a year.
• Independent director: A board member who has no financial or family link with the company's owners or managers, so they can give a neutral view.
• Section 8 company: A non-profit company set up for charitable purposes; it cannot share profits with its members.
• PM CARES Fund: A public charitable trust set up in 2020 to deal with emergencies like the COVID-19 pandemic; companies can count donations to it as CSR.