Corporate Social Responsibility (CSR) – Easy Guide

Corporate Social Responsibility (CSR) is a legal obligation for certain companies in India to allocate a portion of their profits to approved social, environmental, and community development activities. It is governed mainly by Section 135 of the Companies Act, 2013 and Schedule VII, which lists permitted CSR activities. ​

What is CSR and why was it introduced?

• India is the first country to make CSR spending mandatory for qualifying companies under law.​
• The objective is to channel corporate resources towards sustainable development, social welfare, and public–private partnership in nation‑building.​
• CSR is about companies giving back to society instead of focusing only on profit maximisation.​

When does CSR apply?

CSR provisions apply if, in the preceding financial year, a company meets any one of these thresholds:​

• Net worth > ₹500 crore
• Turnover > ₹1,000 crore
• Net profit > ₹5 crore

If CSR is applicable, the Board must ensure that the company spends at least 2% of its average net profits over the immediately preceding three financial years on CSR activities, as per its CSR Policy.​

If the company has existed for less than 3 years, it uses the average of the years completed.​

Why CSR is important for companies

CSR helps companies to:​

• Improve public image and brand reputation by supporting visible social causes.
• Gain favourable media coverage and stakeholder goodwill.
• Build stronger customer loyalty by aligning with societal expectations.
• Differentiate from competitors through genuine community engagement.

Role of the Board of Directors

The Board must:

• Approve the CSR Policy based on CSR Committee recommendations
• Ensure only approved activities are undertaken
• Ensure the company spends a minimum of 2% of the required net profits
• Disclose CSR Committee details, CSR policy, and unspent amounts in the Board Report
• Transfer unspent CSR funds as per legal requirements

Net profit for CSR – how it is computed

For CSR, “net profit” is calculated as per Section 198 of the Companies Act, 2013.​

Credit to be given (included):

Subsidies and bounties received from any government or authorised public authority.​

Profits NOT to be credited (excluded):

• Share premium profits (unless the company is an investment company).
• Profit on sale of forfeited shares.
• Capital profits, such as profit on the sale of an undertaking.
• Profit on sale of fixed assets or immovable property of capital nature (unless dealing in such assets is the leading business).
• Changes in carrying amount of assets or liabilities recognised in equity (fair value adjustments, revaluation gains).
• Notional or unrealised gains.​

Items to be deducted while computing net profit:

• Usual working charges and operating expenses.
• Directors’ remuneration.
• Bonus or commission to staff, engineers, and other employees.
• The Central Government notifies certain taxes on abnormal or excess profits.
• Interest on debentures, mortgages, secured and unsecured loans.
• Repair expenses (non-capital) on movable and immovable property.
• Contributions under Section 181 (charitable contributions).
• Depreciation as per Section 123.
• Excess of expenditure over income.
• Legal damages, compensation, and related insurance.
• Bad debts written off or adjusted.​

Items that CANNOT be deducted:

• Income tax and super tax under the Income‑Tax Act.
• Voluntary damages, compensation, or payments.
• Capital losses (for example, loss on sale of undertaking).
• Fair value changes recognised in equity (similar to exclusions on the credit side).​

Handling unspent CSR amount

1. Unspent amount (NOT related to an ongoing project)

Must be transferred within 6 months to any of these funds:

• PM National Relief Fund
• Other Central Government–notified socio-economic welfare funds
• Approved incubators or R&D bodies
• Public universities, IITs, national labs, ICAR, CSIR, DRDO, DST, etc.

2. Unspent amount (related to an ongoing project)

• Transfer to ‘Unspent CSR Account’ within 30 days of the financial year end
• Must be used within three financial years
• If unused after 3 years, transfer to a specified government fund within 30 days

CSR Committee – when and how to form

A CSR Committee must be formed when CSR provisions apply.

Composition rules:

• General companies: Minimum 3 directors, including 1 Independent Director
• Unlisted public & private companies: No Independent Director required
• Private companies with 2 directors: CSR Committee can have both directors
• Foreign companies: Must have 2 members, including:

                                      1. One resident in India (authorized to accept notices)

                                      2. One nominated by the foreign company

• Companies with unspent CSR balances must also form a CSR Committee

Duties of the CSR Committee

The CSR Committee must:​

• Formulate and recommend the CSR Policy, indicating projects/activities as per Schedule VII.
• Recommend the amount of CSR expenditure.
• Monitor implementation of CSR projects and overall CSR Policy.
• Put in place a transparent monitoring and reporting mechanism for CSR programmes.

CSR reporting requirements

• The Board’s Report for every financial year (from 1 April 2014 onwards) must include a detailed Annual CSR Report.​
• For a foreign company, the CSR report must form part of the documents annexed to the balance sheet filed in India.​

CSR Policy – key requirements

CSR Policy should:​

• Specify the CSR activities to be undertaken (must fall within Schedule VII).
• Exclude activities done in the normal course of business.
• Be disclosed on the company’s website, as approved by the Board.
• Allow collaboration with other companies on joint CSR projects, with separate reporting by each company.
• Include monitoring provisions for CSR projects and programmes.

Penalties for CSR non-compliance

If a company fails to:

• Spend the required CSR amount, or
• Transfer unspent CSR amounts to the specified fund / CSR Account within the timelines,

Then the penalties are:​

Company:

• Penalty up to ₹1 crore or
• Twice the amount required to be transferred,
• Whichever is lower.

Every defaulting officer:

• Penalty up to ₹2 lakh or
• One‑tenth of the amount required to be transferred,
• Whichever is lower.

Regulators have been actively enforcing CSR provisions, and directors are held personally accountable for lapses.​

Schedule VII – permitted CSR activities (summary table)

The Board must ensure CSR projects fall within Schedule VII activities.​

Conclusion

CSR has become a core part of corporate governance in India. It encourages companies to go beyond profit-making and contribute meaningfully to society. By mandating CSR, the Companies Act, 2013 ensures that businesses participate in national development, sustainability, and social welfare.

CSR represents a company’s commitment to give back to society while building long-term goodwill and trust.