Corporate Social Responsibility (CSR) has evolved from a philanthropic ideal into a formal legal obligation under Section 135 of the Companies Act, 2013, in India. This has compelled companies to think beyond profits and actively contribute to the country’s social, environmental, and economic development. CSR reinforces regulatory compliance while simultaneously enhancing brand equity, investor confidence, and stakeholder trust.
In this blog, we will explore the meaning of CSR, its importance, eligibility criteria, and the legal framework governing it.
What is Corporate Social Responsibility (CSR)?
Corporate Social Responsibility (CSR) refers to the statutory obligation imposed on certain classes of companies under Section 135 of the Companies Act, 2013, to allocate a portion of their profits for activities that contribute to the country’s social and economic development, in accordance with Schedule VII of the Act. CSR in India is mandated by law for companies meeting specified financial thresholds.
Legal Framework for CSR in India
Corporate Social Responsibility (CSR) in India is governed by
- Section 135 of the Companies Act, 2013: It lays down the eligibility criteria, constitution of the CSR Committee, formulation of the CSR Policy, spending obligations, and reporting requirements.
- The Companies (Corporate Social Responsibility Policy) Rules, 2014, as amended from time to time, provide procedural and operational clarity on aspects such as implementation through third-party agencies, registration requirements, reporting formats, impact assessment, and administrative overheads.
- Schedule VII of the Companies Act, 2013: It includes the permissible areas for CSR expenditure.
Eligibility Criteria
CSR applies to companies that satisfy any one of the following thresholds in a given financial year:
- Net worth of ₹500 crore or more,
- Turnover of ₹1,000 crore or more, or
- Net profit of ₹ five crore or more.
Once a company crosses any of these thresholds, it is obligated to:
- Form a CSR Committee of the Board (unless the obligation is less than ₹50 lakh),
- Formulate and disclose a CSR Policy,
- Spend at least 2% of the average net profits (calculated over the preceding three financial years) on eligible CSR activities, and
- Disclose the details of such activities and expenditures in their Board Report, file a CSR-2 Form with the Registrar, and publish the same on the company’s website.
Importance of CSR Compliance
CSR compliance is not only a mandatory obligation, but it also provides numerous benefits such as:
- Legal Obligation: CSR is a mandatory requirement under Section 135 of the Companies Act, 2013. Non-compliance attracts monetary penalties for both the company and its officers under Section 135 (7) of the Act.
- Reputation & Investor Relations: Adherence to CSR enhances investor confidence and promotes stakeholder goodwill, particularly among institutions and funds that prioritise Environmental, Social, and Governance (ESG) criteria in their investment strategies.
- Stakeholder Trust: CSR reinforces trust among employees, consumers, and communities by demonstrating commitment to ethical and inclusive growth.
- Alignment with Global Goals: CSR supports India’s commitments to the United Nations Sustainable Development Goals (SDGs). Through responsible corporate behavior, Indian companies can position themselves as global citizens.
- Long-Term Sustainability: Responsible corporate conduct reduces operational risks, builds social capital, and creates resilient business models
The 2% Spending Rule
One of the most distinct aspects of India’s CSR regime is the mandatory 2% spending rule. Section 135(5) of the Companies Act requires every qualifying company to spend, in every financial year, at least 2% of the average net profits made during the three immediately preceding financial years on CSR activities.
It provides:
- Mandatory Expenditure: CSR spending is no longer voluntary; it is a binding statutory requirement.
- Set-Off Provision: Excess CSR expenditure can be carried forward and set off against future obligations for up to three financial years.
- Unspent CSR Funds:
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- If pertaining to ongoing projects: Must be transferred to an Unspent CSR Account within 30 days of the end of the financial year and utilised within three financial years.
- If not related to ongoing projects: Must be transferred to a government-specified fund (such as the PM National Relief Fund) within 6 months.
- Penalties: Failure to comply may result in fines ranging from ₹50,000 to ₹25 lakh for the company and from ₹50,000 to ₹5 lakh for each officer in default.
The rule has been given sharper teeth through enforcement actions and monitoring, facilitated by the introduction of the CSR-2 form in 2022, which enables the MCA to trace funds and ensure transparency.
What Counts as CSR in 2025?
CSR activities must align with Schedule VII of the Companies Act, 2013, which outlines the sectors eligible for CSR spending. As of 2025, these activities include:
- Promoting education, especially among the underprivileged,
- Healthcare and public sanitation (including pandemic responses),
- Environmental sustainability, biodiversity, and climate action,
- Rural development projects,
- Skill development and vocational training,
- Gender equality and women’s empowerment,
- Contributions to national relief funds, and
- Disaster management and rehabilitation.
Recent developments include:
- Green initiatives, such as afforestation, renewable energy, and reducing carbon footprint, are now considered permitted activities.
- Digital literacy and financial inclusion are increasingly recognised under the umbrella of CSR.
- Research and development in science and technology, if directed towards public benefit, are also considered valid CSR initiatives.
NOTE: Activities that benefit only employees, involve political donations, or promote business cannot be claimed as CSR.
How to Report CSR Activities?
The Companies Act mandates the reporting of the following:
1. Board’s Report (Annual Report)
Companies must disclose CSR-related details, including:
- Composition of the CSR Committee,
- Amount prescribed and spent,
- Reasons for any unspent amount, and
- The impact of CSR initiatives.
2. Website Disclosure
The CSR policy, committee composition, and approved projects must be uploaded to the company’s official website.
3. CSR-2 Filing
Form CSR-2 was introduced as a mandatory electronic form in 2022 and must be filed annually with the Registrar of Companies, capturing detailed data on CSR projects, implementing agencies, expenditures, and outcomes.
4. Business Responsibility and Sustainability Report (BRSR)
It is applicable to the top 1000 listed entities by market capitalisation. BRSR disclosures are submitted as part of the annual report and cover ESG, value chain, and sustainability practices, including CSR initiatives.
5. Impact Assessment Reports
Companies with an average CSR obligation of $1.2 million or more over the past three years must conduct third-party impact assessments for projects of $1 or more that were completed at least one year ago.
Best Practices for CSR Compliance
To ensure strategic, efficient, and compliant CSR implementation, companies should adhere to the following best practices:
- Align with Core Values: Select CSR activities that align with the company’s mission and meet stakeholders’ expectations.
- Formulate a Long-Term CSR Strategy: Avoid year-end spending rushes by planning multi-year projects and pipelines.
- Engage in Community Participation: Work closely with beneficiaries, NGOs, and local governments to maximise impact.
- Ensure Transparency: Maintain detailed records of approvals, budgets, contracts, and progress of implementation.
- Regular Monitoring and Evaluation: Establish internal control mechanisms to track fund utilisation and project effectiveness.
- Independent Impact Assessment: Utilize qualified third-party evaluators to verify outcomes, identify gaps, and inform improvements for future projects.
- Train the Board and Committee Members: Conduct regular compliance workshops to keep decision-makers informed about the latest regulatory changes.
Conclusion
In conclusion, Corporate Social Responsibility (CSR) compliance is not merely a statutory formality but a crucial component of responsible and sustainable business practices in India. It allows companies to contribute to the country’s social development. Tata Steel’s “Thousand Schools Programme” in Odisha and Jharkhand has built hospitals, supported sanitation and clean drinking water projects, and undertaken other major CSR activities, such as those by leading Indian companies like Infosys. Additionally, notable examples include the H. N. Reliance Foundation Hospital in Mumbai, established by Reliance. Companies that understand and adopt CSR strategically can benefit both legally and reputationally.
