Corporate Social Responsibility (CSR) in India : Section 135, Account, Reporting

Corporate social responsibility in India is not a discretionary budget line. Section 135 of the Companies Act, 2013 converts it into a measured statutory obligation with a computation method, a bank account, a board report annexure, a Registrar filing and a penalty for getting it wrong. Companies spent ₹34,908.75 crore across 27,188 filers in FY 2023-24 on the basis of annual filings in the MCA21 registry (National CSR Portal data, placed before Parliament on 04/08/2025). This article sets out who is covered, how the 2% is computed, how the spend and any shortfall are accounted for, and what has to be reported and filed.

Which companies have to comply with CSR under Section 135?

A company is covered if, in the immediately preceding financial year, it had net worth of ₹500 crore or more, or turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more (Section 135(1), Companies Act, 2013). Any one trigger is enough. It must then spend at least 2% of the average net profits of the three immediately preceding financial years, computed under Section 198.

Who is covered, and what the obligation actually is

Applicability is tested annually against the immediately preceding financial year, on three independent triggers. Crossing any one brings the company within Section 135 for the current year. Rule 3(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 extends this to a holding company, a subsidiary and a foreign company with a branch office or project office in India, so group structures do not escape by pushing profits into a subsidiary.

Two definitional points decide the number, and both are missed often.

First, “net profit” for the ₹5 crore trigger and for the 2% computation is profit computed under Section 198, not profit before tax in the audited statement of profit and loss. Section 198 adds back and disallows specific items, and the working has to be documented. Second, Rule 2(1)(h) excludes from net profit any profit from overseas branches, and any dividend received from other Indian companies that are themselves covered by and complying with Section 135.

Table 1: Section 135 applicability triggers and the figure to test

Trigger	Threshold	Source of the figure	What trips up first-time filers
Net worth	₹500 crore or more	Section 2(57) definition, audited balance sheet of the preceding FY	Securities premium and reserves are included; revaluation reserves are not
Turnover	₹1,000 crore or more	Section 2(91), gross revenue from sale of goods or services	Other income is not turnover
Net profit	₹5 crore or more	Section 198 computation for the preceding FY	Book profit is used instead of the Section 198 working
Spend obligation	2% of average net profits of three immediately preceding FYs	Section 135(5) read with Section 198 and Rule 2(1)(h)	Overseas branch profit and Section 135 dividend income are not excluded

Three structural rules follow from applicability.

• Where the amount to be spent does not exceed ₹50 lakh, no CSR Committee is required and the Board discharges the Committee’s functions (Section 135(9)).
• A company holding any balance in its Unspent CSR Account must constitute a CSR Committee and comply with Section 135(2) to (6), even if it has fallen below the thresholds (second proviso to Rule 3(1)).
• The old three-year exit grace, which allowed a company ceasing to meet the thresholds to stop complying, was omitted by the Companies (CSR Policy) Amendment Rules, 2022 dated 20/09/2022. Applicability is now a fresh annual test.

Specified IFSC public companies and Specified IFSC private companies are outside Section 135 for five years from commencement of business (notifications G.S.R. 8(E) and G.S.R. 9(E), both dated 04/01/2017). For a GIFT City entity this is a real, time-limited exemption, not a permanent one.

The CSR Committee itself has a composition rule that catches smaller private companies. Section 135(1) requires three or more directors with at least one independent director, but the first proviso drops the independent director requirement where the company is not required to appoint one under Section 149(4), leaving a two-director committee. Rule 5(1)(ii) goes one step further for a private company that has only two directors on its Board in total, permitting the CSR Committee to comprise both of them. A foreign company’s committee, under Rule 5(1)(iii), needs at least two persons, one of whom must be the person resident in India authorised under Section 380(1)(d) to accept service of process.

A company in its first three years, before it has three immediately preceding financial years to average, computes the 2% on the average net profit of the financial years since incorporation, and not on a notional three-year figure. This is a recurring miscalculation among newly incorporated subsidiaries that cross a threshold in year two.

What counts as CSR spend, and what quietly does not

Only activities within Schedule VII, undertaken in the manner set out in the CSR Rules, count. Rule 2(1)(d) carves out six categories that do not qualify, and money spent on them is treated as an unspent shortfall even though it left the bank account. This is the single most expensive mistake in the first year of applicability, because it is discovered at audit, after the financial year has closed and the transfer windows have shut.

Excluded from CSR by Rule 2(1)(d):

• Activities undertaken in the normal course of business.
• Activities outside India, other than training of Indian sports personnel representing a State, Union territory or India.
• Contribution, direct or indirect, to a political party under Section 182.
• Activities benefitting employees of the company, employee being defined by reference to Section 2(k) of the Code on Wages, 2019.
• Activities supported on a sponsorship basis for deriving marketing benefit for the company’s products or services.
• Activities carried out to discharge any other statutory obligation under Indian law.

The implementation route matters as much as the activity. Under Rule 4(1), CSR may be undertaken by the company itself or through a Section 8 company, registered public trust or registered society that is registered under Section 12A and approved under Section 80G of the Income-tax Act, 1961, or is government established, or is established under an Act of Parliament or a State legislature, or has a track record of at least three years in similar activities. Every such entity must register in Form CSR-1 and obtain a CSR Registration Number (Rule 4(2)). MCA substituted the CSR-1 form entirely through the Companies (CSR Policy) Amendment Rules, 2025 dated 07/07/2025, effective 14/07/2025, tightening the disclosure of 80G, 12A and 10(23C) status and requiring certification by a practising Chartered Accountant, Company Secretary or Cost Accountant. Paying an implementing agency that is not validly registered does not discharge the obligation.

Three spending limits sit inside the rules and are commonly breached:

1. Administrative overheads must not exceed 5% of total CSR expenditure for the financial year (Rule 7(1)). General management and administration of the CSR function is an overhead; costs directly incurred in designing, implementing, monitoring and evaluating a specific project are not (Rule 2(1)(b)).
2. Impact assessment is mandatory where the average CSR obligation was ₹10 crore or more in the three immediately preceding financial years, for projects with outlays of ₹1 crore or more completed at least one year earlier (Rule 8(3)(a)). The assessment cost may be booked as CSR expenditure up to 2% of total CSR expenditure for the year or ₹50 lakh, whichever is higher, following the 20/09/2022 amendment.
3. A capital asset created out of CSR funds cannot sit on the company’s balance sheet. It must be held by a Section 8 company, registered public trust or registered society holding a CSR Registration Number, by the project beneficiaries, or by a public authority (Rule 7(4)).

Where does unspent CSR money go at the end of the year?

The treatment depends entirely on whether the shortfall relates to an ongoing project. For an ongoing project, the unspent amount goes to a dedicated Unspent CSR Account in a scheduled bank within 30 days of the end of the financial year and must be spent within three financial years (Section 135(6)). For anything else, it goes to a Schedule VII fund within six months of the end of the financial year (second proviso to Section 135(5)).

An ongoing project is a multi-year project with timelines not exceeding three years excluding the financial year in which it commenced, and includes a project initially approved as a one-year project whose duration the Board has extended on reasonable justification (Rule 2(1)(i)). The label is not a drafting convenience. It has to be supported by board approval, an annual action plan entry under Rule 5(2), and year-wise allocation that the Board monitors under Rule 4(6).

Table 2: Treatment of unspent CSR amounts

Scenario	Where the money goes	Deadline	Provision
Shortfall on an ongoing project	Unspent CSR Account for that financial year, in a scheduled bank	30 days from end of the FY	Section 135(6)
Ongoing project money still unspent after three FYs	A fund specified in Schedule VII	30 days from end of the third FY	Section 135(6)
Shortfall not relating to an ongoing project	A fund specified in Schedule VII	6 months from end of the FY	Second proviso to Section 135(5) read with Rule 10
Surplus generated by CSR activities	Ploughed back into the same project, or to the Unspent CSR Account, or to a Schedule VII fund	6 months from expiry of the FY for the fund route	Rule 7(2)
Excess spent over the 2% obligation	Retained as set-off against the obligation of up to three immediately succeeding FYs	Board resolution required	Rule 7(3)

Two points on the set-off in Rule 7(3). The excess available for set-off cannot include surplus arising out of CSR activities, and the Board must pass a resolution recording the set-off. Companies that overspend and forget the resolution lose the benefit entirely, which is a self-inflicted cash cost in the following year.

Until a specific fund is notified for the purposes of Section 135(5) and (6), the transfer may be made to any fund listed in Schedule VII (Rule 10). In practice most transfers go to the Prime Minister’s National Relief Fund or the PM CARES Fund.

CSR sits inside a wider annual filing calendar that most finance teams run in parallel. Our guide to compliances for a private limited company maps the ROC, governance and event-based filings that fall alongside it.

How is CSR expenditure accounted for in the books?

CSR expenditure is charged to the statement of profit and loss as it is incurred, shown as a separate line item, and a provision is created only where a liability has crystallised. The governing reference is the ICAI Technical Guide on Accounting for Expenditure on Corporate Social Responsibility Activities, revised during 2025, read with Schedule III as amended by the MCA notification dated 24/03/2021.

Expenditure incurred during the year, in cash or in kind, is expensed. For in-kind spend the cost of the goods or services contributed is the measurement basis, and the write-off follows the treatment of any other disposal of that asset.

A provision is required only where the shortfall carries a present obligation. On a non-ongoing project, the obligation to transfer to a Schedule VII fund within six months crystallises at year end and a liability is recognised. On an ongoing project, the amount transferable to the Unspent CSR Account is recognised for the same reason, because Section 135(6) makes the transfer mandatory within 30 days. An intention to spend more next year, without a contractual or statutory obligation, does not create a provision.

The legal basis for this is Ind AS 37 for Ind AS companies and the substantially similar AS 29 for others. The ICAI Accounting Standards Board’s FAQ dated 10/05/2021 walked through the obligating-event test in both standards and concluded that the shortfall on 31 March is itself the obligating event, since Section 135(6) leaves the company no realistic alternative to transferring the unspent amount. That is a narrow test. It recognises the year-end shortfall as a liability; it does not permit recognition of next year’s planned CSR budget as a provision in the current year.

Excess spend is not an asset in the ordinary sense. The ICAI guidance permits recognition of the set-off entitlement only where the Board resolution under Rule 7(3) is in place and the company has reasonable assurance it will be able to use it. Many auditors resist balance sheet recognition and prefer disclosure. Take a position early with the statutory auditor rather than in March.

Surplus arising out of CSR projects, including interest earned on the Unspent CSR Account or proceeds from sale of materials, does not form part of business profit (Rule 7(2)). It cannot be credited to the profit and loss account as other income.

Table 3: Accounting and disclosure map

Event	Accounting treatment	Where it is disclosed
CSR spend incurred in the year	Charged to profit and loss as a separate line item, CSR expenditure	Statement of profit and loss, with a break-up note
Shortfall on a non-ongoing project	Provision recognised at year end for the Schedule VII transfer	Schedule III CSR note, movement in provision shown separately
Shortfall on an ongoing project	Liability recognised for transfer to the Unspent CSR Account	Schedule III CSR note plus the Unspent CSR Account balance
Excess spend	Set-off entitlement, subject to Board resolution under Rule 7(3)	Schedule III CSR note and the Annexure II reporting table
Surplus from CSR activities	Not credited to business profit, ploughed back or transferred	Schedule III CSR note and the CSR annexure
Contribution to a group trust or society	Related party transaction under the applicable accounting standard	Schedule III CSR note, related party disclosure

Schedule III, effective from 01/04/2021 and applying to all three Divisions, requires a company covered by Section 135 to disclose eight items in the notes to accounts: the amount required to be spent during the year, the amount of expenditure incurred, the shortfall at the end of the year, the total of previous years’ shortfall, the reason for the shortfall, the nature of CSR activities, details of related party transactions such as a contribution to a trust controlled by the company, and, where a provision has been made in respect of a liability incurred under a contractual obligation, the movement in that provision during the year.

One control sits outside the ledger but conditions it. Rule 4(5) requires the Board to satisfy itself that disbursed funds were used for the approved purpose and in the approved manner, certified by the Chief Financial Officer or the person responsible for financial management. That certificate is the evidence trail the statutory auditor will ask for, so utilisation certificates and periodic reporting belong in the implementing agency contract at the start of the project.

CSR reporting: board report, website and Form CSR-2

Reporting runs on three tracks, each with its own legal basis and its own penalty: the annual report on CSR annexed to the Board’s report under Section 134(3)(o) read with Rule 8(1), website disclosure of the CSR Committee composition, CSR Policy and board-approved projects under Rule 9, and Form CSR-2 filed with the Registrar under Rule 12(1B) of the Companies (Accounts) Rules, 2014.

The annual report on CSR follows the format in Annexure II as substituted by the Companies (CSR Policy) Amendment Rules, 2022 dated 20/09/2022. It requires, among other things, the average net profit under Section 135(5), the 2% obligation, set-off available from preceding years, surplus, the amount spent split between ongoing and other than ongoing projects, details of transfers to the Unspent CSR Account and to Schedule VII funds with dates, details of capital assets created and the entities holding them, and, where the company has not spent the full amount, the reasons.

Form CSR-2 was inserted with effect from 11/02/2022 and captures the same substance in a machine-readable form. Two changes matter for the current cycle. MCA notified revised annual filing e-forms on MCA V3, including CSR-2 as an e-form linked to AOC-4, through the Companies (Accounts) Second Amendment Rules, 2025 dated 30/05/2025, with effect from 14/07/2025. Separately, General Circular No. 02/2025 dated 16/06/2025 dealt with filing CSR-2 on V3 where the underlying AOC-4 had been filed on the decommissioned V2 portal.

Because MCA has repeatedly fixed standalone CSR-2 dates by notification, the date for the year in hand should be read off the current text of Rule 12(1B) rather than assumed. For FY 2023-24 it was moved to 30/06/2025 by notification G.S.R. 317(E) dated 19/05/2025. For later years the form is filed as a linked addendum to AOC-4, itself due within 30 days of the annual general meeting under Section 137. Verify the operative proviso before filing, because the linkage means an error in the CSR data can block the financial statement filing itself.

Table 4: CSR reporting obligations and where default is penalised

Obligation	Legal basis	Timing	Penalty on default
Annual report on CSR annexed to Board’s report	Section 134(3)(o), Rule 8(1), Annexure II	With the Board’s report for the FY	Section 134(8)
CSR Committee, Policy and projects on the website	Rule 9	Ongoing	Section 450
Form CSR-2 to the Registrar	Rule 12(1B), Companies (Accounts) Rules, 2014	As linked to AOC-4, or the date notified for that FY	Section 450
Spend and transfer of unspent amounts	Section 135(5) and 135(6)	30 days or 6 months, as applicable	Section 135(7)

A listed company carries a fifth reporting track that private and unlisted companies do not. Regulation 34(2)(f) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 requires the top listed entities by market capitalisation to file Business Responsibility and Sustainability Reporting, and Principle 8 of that framework asks whether Section 135 obligations are triggered and how the company has performed against them. BRSR does not replace the CSR annexure required under Rule 8; it sits alongside it and draws on the same underlying figures. A mismatch between the CSR spend disclosed in the Board’s report and the CSR spend disclosed in BRSR is now a visible inconsistency to any analyst or lender reading both documents side by side, and it invites a SEBI query independent of anything the Registrar does under Section 135(7).

What does non-compliance actually cost?

Under Section 135(7), a company that fails to comply with Section 135(5) or 135(6) is liable to a penalty of twice the amount required to be transferred, or ₹1 crore, whichever is less. Every officer in default is liable to one-tenth of that amount, or ₹2 lakh, whichever is less. These are civil penalties adjudicated by the Registrar under Section 454, not criminal proceedings.

The enforcement pattern shows that voluntary rectification reduces the quantum but does not avoid the penalty. In an order dated 07/01/2026, ROC Chennai adjudicated a Section 135(7) default where the company had failed to spend ₹27,12,722 for FY 2021-22 and had transferred the entire amount to the Prime Minister’s National Relief Fund on 23/12/2024, before any adjudication proceedings began. The penalty still followed.

Reporting defaults are adjudicated separately. ROC Kolkata, by an order dated 05/02/2026, penalised a company under Section 134(8) for failing to disclose in its Board’s report the reasons for not spending the prescribed CSR amount. ROC Cuttack, by an order dated 13/07/2026, penalised a company and its officers under Section 450 for filing Form CSR-2 for FY 2020-21 roughly four years late, Section 450 carrying ₹10,000 plus ₹1,000 per day of continuing default.

The practical reading is that the spend, the transfer, the board report disclosure and the CSR-2 filing are four separate defaults, each independently penalised. Curing the spend does not cure the filing.

The statutory auditor is drawn in independently of the Registrar. Clause 3(xx) of the Companies (Auditor’s Report) Order, 2020 requires the auditor to report whether, for other than ongoing projects, unspent CSR amounts were transferred to a Schedule VII fund within six months of the financial year end, and whether ongoing-project shortfalls were transferred to the Unspent CSR Account within 30 days, in each case recomputing the Section 198 obligation independently rather than accepting the company’s own working. A qualified CARO opinion on clause 3(xx) is now a standard red flag for lenders and rating agencies, and it precedes any Registrar action by months.

For defaults outside Section 135(5) and (6), such as failing to constitute a CSR Committee or omitting the disclosure required under Section 134(3)(o), the general penalty in Section 134(8) applies: ₹3 lakh on the company and ₹50,000 on every officer in default. Where no specific penalty is prescribed at all, Section 450 falls back to ₹10,000 on the company and each officer, plus ₹1,000 a day for a continuing default.

The tax and GST cost nobody budgets for

CSR expenditure is not deductible as business expenditure, and GST paid on CSR procurement is a blocked credit. The combined effect is that the true cost of a ₹1 crore CSR obligation is ₹1 crore plus the GST on it plus the tax on the disallowed amount, not ₹1 crore net of tax.

For tax year 2026-27 onwards, Section 34(2)(b) of the Income-tax Act, 2025 provides that expenditure on activities relating to corporate social responsibility referred to in Section 135 of the Companies Act, 2013 is not expenditure laid out wholly and exclusively for business. This carries forward Explanation 2 to Section 37(1) of the Income-tax Act, 1961, which continues to govern FY 2025-26 and earlier years. The carve-out survives the recodification: Section 34(1) only excludes expenditure of the nature specified in Sections 28 to 33, so CSR spend that independently answers the description of those sections remains allowable under them.

The donation route is narrower than it looks. Donations forming part of CSR spend may qualify under Section 80G of the 1961 Act, now Section 133 of the 2025 Act, and tribunals have repeatedly held that disallowance under Section 37(1) does not by itself bar the Section 80G claim. Two limits apply. Contributions to the Swachh Bharat Kosh and the Clean Ganga Fund made in pursuance of the Section 135 obligation are expressly excluded. More significantly, a domestic company taxed under the concessional regime in Section 115BAA of the 1961 Act, now Section 200 of the 2025 Act, cannot claim Chapter VI-A deductions other than the employment and inter-corporate dividend provisions, which closes the 80G route entirely for most large companies.

On the indirect tax side, Section 17(5)(fa) of the Central Goods and Services Tax Act, 2017, inserted by the Finance Act, 2023 and effective from 01/10/2023 by Notification No. 28/2023-Central Tax, blocks input tax credit on goods or services used or intended to be used for CSR obligations under Section 135. Credit taken must be reversed and reported in Table 4(B)(1) of GSTR-3B.

Table 5: Fiscal treatment of CSR spend

Item	Position	Provision	Effect on the CSR budget
Deduction as business expenditure	Not allowed	Section 34(2)(b), Income-tax Act, 2025; Explanation 2 to Section 37(1), 1961 Act	Full pre-tax cost
Spend answering Sections 28 to 33	Allowable under those sections	Section 34(1), Income-tax Act, 2025	Partial relief, fact specific
Donation deduction	Available in principle, subject to exclusions	Section 133, Income-tax Act, 2025, earlier Section 80G	Closed for companies under Section 200 or 115BAA
Input tax credit on CSR procurement	Blocked	Section 17(5)(fa), CGST Act, 2017	GST becomes an absolute cost
TDS on payments to vendors and agencies	Applies normally	Chapter on tax deduction at source	Withhold on implementation contracts

Two points surface in audit. Tax deduction at source applies to CSR payments as to any other contract for services, and failure to withhold is a separate default. And the figures in the books, the Schedule III note, the Annexure II annual report, Form CSR-2 and the tax audit disallowance must reconcile, because an inspector reading one against another is the common enforcement entry point.

Will the Corporate Laws (Amendment) Bill, 2026 change any of this?

Not yet. The Corporate Laws (Amendment) Bill, 2026 (Bill No. 85 of 2026) was introduced in the Lok Sabha on 23/03/2026 and referred to a Joint Parliamentary Committee, which presented its report on 03/08/2026 recommending adoption with clause-wise modifications. As on the date of this article the Bill is not law, and every obligation described above continues to apply in full.

Clause 43 of the Bill amends Section 135 directly, and the drafting is specific enough to plan against.

• Section 135(1): the net profit trigger rises from ₹5 crore to ₹10 crore, or such other sum as may be prescribed. The net worth and turnover triggers of ₹500 crore and ₹1,000 crore are unchanged, so the relief is asymmetric and reaches only companies that are small on profit but already large on the balance sheet or revenue.
• Section 135(6): the transfer window for an ongoing-project shortfall into the Unspent CSR Account is extended from 30 days to 90 days from the end of the financial year.
• Section 135(9): the threshold below which a separate CSR Committee is not required rises from ₹50 lakh to ₹1 crore, or such higher amount as may be prescribed, meaning more companies would be able to let the Board discharge the Committee’s functions directly.
• Companies meeting prescribed conditions may be taken outside the CSR provisions altogether, with the conditions left to delegated legislation.
• The JPC has also recommended permitting in-kind CSR contributions for small companies.

Commencement will be by notification, and different provisions may be brought into force on different dates. A company sitting just above ₹5 crore of Section 198 net profit should plan on the current law for FY 2026-27 and treat any relief as an upside, not a basis for deferring the spend. The penalty in Section 135(7) applies to the year in which the default occurs, not the year in which the law changes.

Common mistakes that cost time and money

Computing the obligation on book profit instead of Section 198 net profit. The two rarely match, and the error runs in both directions. An overstated obligation wastes cash; an understated one produces a shortfall that is discovered at audit, after the 30-day and six-month transfer windows have closed, converting a computational slip into a Section 135(7) penalty of twice the shortfall.

Labelling a project as ongoing to buy three more years. Rule 2(1)(i) requires a multi-year project with defined timelines, board approval and year-wise allocation monitored under Rule 4(6). Where the label is applied to an ordinary annual donation, the correct treatment was a Schedule VII transfer within six months, and the company has already missed it by the time the point is taken.

Paying an implementing agency without checking its CSR Registration Number. Rule 4(1) and 4(2) make registration and the underlying 12A and 80G status conditions of eligibility, and the CSR-1 form was rewritten with effect from 14/07/2025 to tighten exactly this verification. If the agency is not validly registered, the payment does not count as CSR spend at all.

Treating employee welfare or brand-led sponsorship as CSR. Rule 2(1)(d)(iv) and (v) exclude activities benefitting employees as defined under the Code on Wages, 2019 and activities supported on a sponsorship basis for marketing benefit. Marketing-adjacent spend is the most frequently reclassified item in a CSR audit.

Missing the Board resolution for set-off. Rule 7(3) permits carry forward of excess spend for three succeeding financial years only where the Board passes a resolution to that effect. Without it the company has simply made a gift of the excess.

Letting the four records drift apart. The ledger, the Schedule III note, the Annexure II annual report and Form CSR-2 are prepared by different people at different times. One reconciliation before the AOC-4 filing costs far less than explaining a mismatch to the Registrar afterwards.

Frequently asked questions

Q: Is CSR expenditure deductible under the Income-tax Act?

A: No. Section 34(2)(b) of the Income-tax Act, 2025 excludes CSR expenditure referred to in Section 135 from business expenditure for tax year 2026-27 onwards, carrying forward Explanation 2 to Section 37(1) of the 1961 Act. Spend that independently answers the description of Sections 28 to 33 of the 2025 Act remains allowable under those sections.

Q: Can a company claim Section 80G on its CSR donations?

A: In principle yes, and tribunals have consistently held that disallowance of CSR under Section 37(1) does not bar a claim under Section 80G, now Section 133 of the 2025 Act. Contributions to the Swachh Bharat Kosh and Clean Ganga Fund made in discharge of the Section 135 obligation are excluded, and a company taxed under Section 115BAA, now Section 200, cannot claim it at all.

Q: Can input tax credit be claimed on GST paid on CSR spend?

A: No. Section 17(5)(fa) of the CGST Act, 2017, effective 01/10/2023, blocks credit on goods or services used or intended to be used for CSR obligations under Section 135. Any credit taken must be reversed and reported in Table 4(B)(1) of GSTR-3B.

Q: How long does the full CSR compliance cycle take end to end?

A: Roughly eighteen months from plan to filing. The annual action plan is board approved in April or May, spend runs through the year, the position should be closed by mid-February, transfers fall within 30 days or six months of 31 March depending on classification, the Annexure II report goes with the Board’s report, and CSR-2 follows AOC-4 after the annual general meeting.

Q: What documents must be kept on file for a CSR audit?

A: The Section 198 computation, CSR Policy, annual action plan under Rule 5(2), board and committee minutes, the implementing agency’s CSR Registration Number and CSR-1 acknowledgement, implementation agreement, invoices and payment proofs, utilisation certificates, the Rule 4(5) CFO certificate, impact assessment reports where applicable, and Unspent CSR Account bank statements.

Q: Can CSR funds be spent outside India?

A: No, other than training of Indian sports personnel representing a State, Union territory or India at national or international level. Rule 2(1)(d)(ii) excludes activities undertaken outside India. A foreign parent’s global CSR programme does not discharge the Indian subsidiary’s Section 135 obligation.

Q: Does a foreign company with an Indian branch have to comply?

A: Yes, if it meets the thresholds. Rule 3(1) covers a foreign company under Section 2(42) having a branch office or project office in India, with net worth, turnover and net profit computed from the balance sheet and profit and loss account prepared under Section 381(1)(a) read with Section 198. The annual report on CSR goes into the balance sheet filed under Section 381(1)(b).

Q: Can CSR be routed through a trust or foundation set up by the promoter family?

A: Yes, subject to Rule 4(1). The entity must be a Section 8 company, registered public trust or registered society with 12A registration and 80G approval, or must have a three-year track record in similar activities if not established by the company. It must hold a CSR Registration Number, and the contribution is a related party transaction requiring separate disclosure under the Schedule III CSR note.

Q: Do DPIIT-recognised startups get any exemption from Section 135?

A: No. There is no startup carve-out in Section 135. The only entity-level exemption is for Specified IFSC public and private companies, for five years from commencement of business, under notifications G.S.R. 8(E) and G.S.R. 9(E) dated 04/01/2017. A recognised startup that crosses any threshold is covered like any other company.

Q: What happens if a CSR project fails or the implementing agency stops work?

A: The obligation does not lapse. Under Rule 4(6) the Board monitors ongoing projects against approved timelines and may make modifications within the overall permissible period, and under Rule 5(2) the annual action plan can be altered during the year on the Committee’s recommendation with recorded justification. Money not deployed remains a shortfall subject to the transfer rules.

Q: Is a provision required in the accounts for an unspent CSR amount?

A: Yes, where a present obligation exists. A shortfall on a non-ongoing project creates a statutory obligation to transfer to a Schedule VII fund, and the shortfall on an ongoing project creates an obligation to transfer to the Unspent CSR Account. Both are recognised as liabilities. A general intention to spend more in a later year does not.

Q: How is excess CSR spend treated in the accounts and in the next year’s obligation?

A: Excess spend may be set off against the obligation of up to three immediately succeeding financial years, provided it excludes surplus from CSR activities and the Board passes a resolution recording the set-off (Rule 7(3)). Balance sheet recognition of the entitlement should be agreed with the statutory auditor before year end.

Q: What is the penalty for late filing of Form CSR-2?

A: Rule 12(1B) carries no penalty of its own, so Section 450 applies: ₹10,000 on the company and on every officer in default, plus ₹1,000 per day of continuing default. ROC Cuttack applied this in an order dated 13/07/2026 for a CSR-2 filing delay of roughly four years relating to FY 2020-21.

Q: If a company stops meeting the thresholds, when can it stop complying?

A: Applicability is tested afresh each year against the immediately preceding financial year, since the three-year exit grace in Rule 3(2) was omitted with effect from 20/09/2022. However, a company holding any balance in its Unspent CSR Account must continue to constitute a CSR Committee and comply with Section 135(2) to (6) until that balance is exhausted.

Q: Does a listed company have to report CSR twice, once under the Companies Act and once under SEBI rules?

A: Effectively yes. The Rule 8 annual report on CSR is annexed to the Board’s report under the Companies Act. A listed company within SEBI’s Business Responsibility and Sustainability Reporting mandate additionally reports its Section 135 performance under Principle 8 of that framework, per Regulation 34(2)(f) of the SEBI Listing Regulations. The two disclosures must show consistent figures.

Q: Does the statutory auditor comment on CSR compliance separately from the Registrar?

A: Yes. Clause 3(xx) of the Companies (Auditor’s Report) Order, 2020 requires the auditor to independently recompute the Section 198 obligation and report on whether non-ongoing shortfalls were transferred to a Schedule VII fund within six months and ongoing-project shortfalls to the Unspent CSR Account within 30 days. A qualified remark here typically surfaces before any Registrar adjudication.

Q: Does the Corporate Laws (Amendment) Bill, 2026 already raise the CSR threshold to ₹10 crore?

A: No. The Bill was introduced on 23/03/2026 and the Joint Parliamentary Committee reported on 03/08/2026, but it has not been enacted or notified. The ₹5 crore net profit trigger in Section 135(1) continues to apply, and non-compliance during this period attracts Section 135(7) in full.

The first year under Section 135 produces most of the penalties, because the obligation, the accounting, the annexure and the filing arrive at once and the transfer deadlines fall before anyone has audited the numbers. None of it is complex once the Section 198 computation, the ongoing project classification and the implementing agency documentation are settled early. Companies that treat CSR under Section 135 as a February decision rather than a September reconciliation rarely pay a penalty.

Regulatory references:

• Companies Act, 2013, Section 135, Section 134(3)(o), Section 134(8), Section 137, Section 149(4), Section 198, Section 450, Section 454 and Schedule VII
• Companies (Auditor’s Report) Order, 2020, clause 3(xx)
• Companies (Corporate Social Responsibility Policy) Rules, 2014, Rules 2, 3, 4, 5, 7, 8, 9 and 10
• Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 dated 22/01/2021
• Companies (Corporate Social Responsibility Policy) Amendment Rules, 2022 dated 20/09/2022
• Companies (Corporate Social Responsibility Policy) Amendment Rules, 2025, G.S.R. 452(E) dated 07/07/2025, effective 14/07/2025
• Companies (Accounts) Rules, 2014, Rule 12(1B); Companies (Accounts) Amendment Rules, 2025, G.S.R. 317(E) dated 19/05/2025; Companies (Accounts) Second Amendment Rules, 2025, G.S.R. 357(E) dated 30/05/2025, effective 14/07/2025
• MCA General Circular No. 02/2025 dated 16/06/2025 on filing Form CSR-2 after the MCA21 V2 to V3 transition
• MCA General Circular No. 14/2021 dated 25/08/2021, FAQs on CSR
• Schedule III to the Companies Act, 2013, as amended by MCA notification dated 24/03/2021, effective 01/04/2021
• Notifications G.S.R. 8(E) and G.S.R. 9(E) dated 04/01/2017, exemptions for Specified IFSC companies
• Income-tax Act, 2025, Section 34(1), Section 34(2)(b), Section 133 and Section 200
• Income-tax Act, 1961, Explanation 2 to Section 37(1), Section 80G and Section 115BAA